REAL ESTATE OPPORTUNITIES LIMITED 
By Preliminary Results for the year ended 28 February 2011 Highlights The Chairman's Statement The Investment Advisers' Report |
Highlights | Successful completion of balance sheet restructuring:
Significant progress made towards planning permission for Battersea Power Station:
Market conditions remain challenging:
Continued strong operational performance:
Ray Horney, Chairman, said: “We have made substantial progress over the last year. The successful completion of the restructuring of the balance sheet in May 2011 and the significant progress made towards securing planning permission for Battersea Power Station represents the first, important step in determining the Group’s future. However, while there are satisfactory underlying trends with the operating performance, challenges do of course remain. The agreement with NAMA, following signature of the Memorandum of Understanding (MOU), will secure the short term funding requirements of the business. However, there remains the significant task, in a difficult trading environment, of realising or refinancing assets in order to repay the liabilities owed to NAMA and other creditors. Your Board is working to achieve this outcome over the next few years.” |
Chairman's StatementClick to return to the top of this page | The period from 1 March 2010 has seen considerable progress made with the successful
implementation of the balance sheet restructuring of the Group and towards the receipt of
planning permission for Battersea Power Station, which provides the Group with renewed
optimism for the future. These are major achievements for the Group.
Restructuring On 11 April 2011, the Group announced the final terms of the Restructuring, whereby the liabilities due to the holders of both the Group’s 7.5% Convertible Unsecured Loan Stock (“ CULS” ) and the Zero Dividend Preference Shares (“ ZDPs” ) would be converted into equity of the newly formed Battersea Power Station Shareholder Vehicle Ltd (“ BPSSV” ) and REO.The resolutions in respect of the above proposals were overwhelmingly approved by each class of stakeholder at Extraordinary General Meetings held on 5 May 2011. The Restructuring became effective on 12 May 2011, with the listings of the CULS and ZDPs on the Official List (standard category) subsequently cancelled on that date and approximately 111 million additional Ordinary Shares in Real Estate Opportunities plc (“ REO” ) admitted to the Official List (standard category). The holder of the Series A and Series B loan notes (the “ Oriental Loan Notes/OLNs” ) has also agreed to a standstill arrangement whereby repayment of the OLNs will be deferred until 31 August 2011 or beyond, if the Battersea Power Station loan facilities referred to below are similarly extended, subject to certain conditions. The obligations under the OLNs have also been transferred from REO to BPSSV. The Group has also renegotiated the loan facilities relating to Battersea Power Station with both Lloyds Banking Group (previously Bank of Scotland) and the National Asset Management Agency (“ NAMA” ) (previously Bank of Ireland), extending the existing facility to 31 August 2011. Currently, these facilities can be called on demand. The relevant guarantees under the loan facilities have also been transferred to BPSSV. Battersea Power Station As previously announced, the Group’s planning application on the Battersea Power Station project has now been approved by Wandsworth Council, the Mayor of London and the Secretary of State for Communities and Local Government. Final grant of planning permission as represented by the Section 106 agreement between the Group, Wandsworth Council and Transport for London is anticipated in the near future.The Group continues to engage with prospective investors identified during the global investment roadshow with the aim of introducing a long term equity partner(s) into the newly formed Battersea Power Station vehicle. After generating a significant degree of interest from prospective investors, the process of identifying the development partner(s) for Battersea Power Station and agreeing terms is approaching finalisation of a shortlist of potential investors. Successful completion of this process and the subsequent capital injection will allow the Group to repay and/or refinance the OLNs and the existing Battersea Power Station loan facilities and facilitate the procurement of development finance.Construction of Phase 1 of the development is scheduled to commence in 2012 with completion in 2016. The remaining phases, including the first ever privately funded extension to the tube network in Central London, are scheduled for completion thereafter. NAMA The Group submitted a comprehensive business plan in May 2010 for review by NAMA. The initial evaluation process resulted in a signed Memorandum of Understanding (“ MOU” ) in December 2010, the terms of which are non-binding. The terms include the consolidation and renewal of loan facilities and the provision of working capital. NAMA will monitor the Group’s subsequent performance to ensure that it adheres to targets contained in the MOU and, subject to further negotiations, binding facility agreements are expected to be entered into in the near futureProperty Portfolio & Business Activity The value of the property portfolio as at 28 February 2011 amounted to £1,004 million, a reported decrease of 8.5% from the 28 February 2010 valuation of £1,097 million. This reported decrease in the portfolio valuation is principally due to a revaluation adjustment, which has been further impacted by the fact that the Euro has weakened significantly against Sterling in the past year. The Group’s UK portfolio, which is primarily comprised of Battersea Power Station, increased by 16.4% in the year, whilst the Irish portfolio values declined on average by 21.3% in the year, primarily due to negative revaluation adjustment. Despite current market conditions, the Group’s investment portfolio continues to perform strongly, with occupancy levels at 95% and a rent weighted average lease length of 12 years.In February 2011, the Group announced that it had entered into an agreement for lease with Tullow Oil plc for a total of 48,000 sq ft in the Central Park development in Leopardstown, Dublin, which represented a doubling in size of the existing rental space currently occupied by the tenant in the same development. In July 2010, the Group successfully completed a rent review, determined at arbitration, with Marks & Spencer (Patrick Street, Cork), resulting in a significant increase on the previous rent, with the new rent being effective from July 2009.REO’s strategy of focussing on quality tenants in locations and formats with good occupier appeal has delivered high occupancy levels and a strong operational performance. The Group continues to pro-actively manage its investment portfolio, with no material defaults to date. This combination of prime office/retail locations and high quality, diversified tenants such as Vodafone, Merrill Lynch, KPMG, Tullow Oil plc and Marks & Spencer, has ensured that the Group’s investment portfolio continues to post strong operational results.A prudent approach towards the timing of the Group’s development pipeline continues to be adopted, with construction completed on only one development project, Montevetro, during the year. On 8 April 2011, the Group completed the sale of Montevetro, Dublin’s tallest commercial office building, to Google for £85.2 million, resulting in an accounting profit of £31 million, having recorded an impairment provision in previous periods.As evidenced by the recent successful planning decision in Sligo, the Group continues to seek appropriate planning permissions within its current development portfolio as part of its long term development strategy. Listings On 17 February 2011, the listing category of REO on the Official List of the UK Listing Authority changed from a premium to a standard listing. On 16 March 2011, the Company also cancelled its listings of ordinary shares and CULS on the Official Lists of both the Irish Stock Exchange and the Channel Islands Stock Exchange. Following the successful completion of the balance sheet restructuring on 12 May 2011, the listings of the CULS and ZDPs on the Official List (standard category) were subsequently cancelled on that date and approximately 111 million additional Ordinary Shares in REO were admitted to the Official List (standard category). Outlook The Board is pleased at the successful completion of the balance sheet restructuring of the Group’s debt and the significant progress made towards securing planning permission on its Battersea Power Station development.However, the Group’s portfolio and performance continues to be impacted as a consequence of ongoing concerns over Ireland’s banking system and sovereign debt. These are matters principally beyond our control. The provision of the assistance programme by the EU/IMF to the Irish government will result in spending cuts and tax increases which may impact adversely on future economic growth in Ireland, the outlook for which remains subdued (1). Uncertainty also surrounds the potential introduction of legislation by the Irish government in respect of upward only rent provisions in existing leases. While significant progress has been made in the past twelve months including completion of the balance sheet restructuring, various resolutions to grant planning permission on Battersea Power Station and a signed Memorandum of Understanding (MOU) with NAMA, the Group remains faced with the task of repaying and/or refinancing significant financial liabilities to various creditors. The Board is working to achieve this outcome over the next few years. (1) OECD: Ireland – Economic Forecast Summary (25 May 2011) |
Investment Advisers' Report Click to return to the top of this page | INVESTMENT PORTFOLIO Despite ongoing concerns in the commercial and retail property sectors, REO’s investment portfolio continues to perform strongly, as evidenced by high occupancy rates remaining of 95% and only 4% of rent roll in arrears, resulting in an annualised rent roll of • 40.1 million on the Irish investment portfolio. Rent weighted average lease length is approximately 12 years. Property income in the twelve months ended 28 February 2011 was £34 million, reduced from £44 million for the fourteen months ended 28 February 2010, due to a combination of factors including reduced reporting period, lease restructuring, impact of upward rent reviews retrospectively applied in previous period and negative currency translation impact.By focussing on high occupancy levels and quality tenants in locations and formats with strong occupier appeal, the Group continues to pro-actively manage its investment portfolio, with no material defaults to date. This combination of prime office/retail locations and high quality, diversified tenants such as Vodafone, Merrill Lynch, KPMG, Tullow Oil plc and Marks & Spencer, has ensured that the Group’s investment portfolio continues to post strong operational results. As noted in the Chairman’s Statement, the Group successfully completed a rent review, determined at arbitration, with Marks & Spencer (Patrick Street, Cork), resulting in a significant increase on the previous rent, with the new rent being effective from July 2009. The increased rental space taken by Tullow Oil plc in the Central Park development in Leopardstown, Dublin, which represents a doubling in size of the existing rental space currently occupied by the tenant in the same development, is further evidence of the Group’s ability to secure quality tenants in prime locations. DEVELOPMENT PORTFOLIOBattersea Power StationAs outlined in the Chairman’s Statement, the Group has made significant progress towards securing planning permission on the above project, with construction of Phase 1 of the development scheduled to commence in 2012, with completion in 2016. The process to introduce an equity partner(s) into the new Battersea Power Station Shareholder Vehicle Limited, BPSSV, is approaching finalisation of a shortlist of potential investors, following a high level of interest generated by the global investment roadshow. The development, which represents the largest ever scheme undertaken in Central London, will act as a catalyst for the regeneration of the Nine Elms Opportunity Area and is expected to generate approximately 15,000 new jobs and training opportunities for the area. The scheme will also include a new underground station on the proposed extension of the Northern Line from Kennington to Nine Elms and Battersea. Irish Development Portfolio Progress within the Irish development portfolio in the period includes: Montevetro REO’s development of the 15-storey landmark building, which is Dublin’s tallest commercial office building, commenced in March 2008 and completed in January 2011. Discussions between REO’s investment adviser, Treasury Holdings, and Google began in early 2010 about Google taking a lease of the building but subsequently developed into discussions for an outright sale. Initial exchange of contracts took place on 17 February 2011 with completion of the sale, for a price of £85.2 million, which was satisfied in cash, in April 2011. Central Park As noted above, the FTSE 100 index listed, international oil and gas exploration company, Tullow Oil plc, is to lease a total of 48,000 sqft in Number One, Central Park in Leopardstown, Dublin, which is a state of the art office block. Central Park, which is REO’s prime suburban development, is home to a range of blue chip clients including Vodafone, Tullow Oil plc, Ulster Bank (Royal Bank of Scotland), Volkswagen Bank, Lease Plan and Merrill Lynch. The opening of the LUAS Green line extension in October 2010 improves access to the city centre, further enhancing the location’s importance in providing high quality commercial accommodation for blue chip corporates. Despite the absence of current development projects, REO continues to actively pursue appropriate planning permissions on various projects in Ireland, as evidenced by the recent receipt of local authority planning for a 232,000 sqft private hospital and rehabilitation facility, along with 260 car park spaces, in Sligo, which represents Phase 1 of this development. Sustainability Through its role as investment adviser and portfolio manager for REO, Treasury Holdings, which has been a carbon neutral company since 2007, promotes environmental protection and sustainability across all aspects of REO’s property portfolio via the implementation and use of environmentally friendly materials and renewable energy initiatives. Many REO developments, such as Montevetro and Central Park, have set very high environmental standards and the provision of sustainable buildings, such as these, offer competitive advantages to corporate tenants through lower operating costs and better indoor environmental quality, thereby allowing tenants to demonstrate progress towards corporate environmental objectives. The Battersea Power Station development will lead the way in delivering a highly sustainable development, through the creation of a mixed use community, new public transport provided by the Northern Line Extension and ground breaking environmental measures. The project includes a CCHP energy centre generating 30MW of electricity which, together with other efficiency measures, will enable the Power Station to become zero carbon and the rest of the development to be low carbon, saving approximately 65% of CO2 emissions across the entire site. VALUATIONS The value of the portfolio as at 28 February 2011 amounted to £1,004 million, a reported decrease of 8.5% from the 28 February 2010 valuation of £1,097 million. Valuation Methodology Investment properties and investment properties under development are stated at fair value in accordance with GAAP at 28 February 2011 and have been valued by independent property valuers. Irish Investment Properties: The value of Irish investment properties has declined on average by 15.2% in the twelve months to 28 February 2011, which is broadly consistent with decreases in capital values as disclosed by SCS IPD index in the intervening period. Irish Development Properties: The value of Irish properties under development, which are classified as sites in the course of development, has decreased on average by 35.9% in the twelve months to 28 February 2011. Market sentiment continues to be negatively weighted in the development sector during the period under review due to high levels of uncertainty as the market waits to assess the operational impact of NAMA, together with the absence of liquidity in the banking sector.UK Properties: The value of the UK property portfolio has increased by 16.4% in the 12 months to 28 February 2011. This is primarily due to significant progress made towards securing planning permission on the Battersea Power Station development. Pending the introduction of a third party investor into the newly formed Battersea Power Station Shareholder vehicle, construction of Phase 1 of the development is scheduled to commence in 2012, with completion in 2016. FINANCIAL REVIEW Valuations & Net Asset Value (“NAV”)As noted above, the value of the portfolio as at 31 August 2010 amounted to £1,004 million, a reported decrease of 8.5% since 28 February 2010. The deficit on the consolidated shareholders’ funds at 28 February 2011 is £801 million (28 February 2010: £722 million deficit) – the effect of the recently completed balance sheet restructuring will see this deficit reduce to £559 million.The consolidated net deficit of the Group under the EPRA guidelines is £718 million at 28 February 2011 (28 February 2010 EPRA net deficit: £595 million).Diluted EPRA deficit per share was -215.1p as at 28 February 2011, representing an increase in the deficit from -178.2p at 28 February 2010. Profit & Loss Property income amounted to £34 million in the twelve months to 28 February 2011, representing a decrease from £44 million in the prior fourteen month period primarily due to reduced reporting period, lease restructuring, impact of upward rent reviews retrospectively applied in previous period and negative currency translation impact. After valuation losses and operating expenses, the reported operating loss was £45 million (14 months ended 28 February 2010: £816 million). Net financial expenses were £46 million in the year (14 months ended 28 February 2010: £112 million), whilst accounting profits on disposal of investments in China Real Estate Opportunities plc and the Montevetro development property were £26 million and £31 million respectively, having recorded impairment provisions in respect of both items in previous periods. This has resulted in a REO loss after taxation for the period of £77 million (14 months ended 28 February 2010: £828 million), including an income tax credit of £14 million.Administrative expenses in the year to 28 February 2011 have increased significantly in comparison to the prior period due principally to professional fees incurred in respect of the balance sheet restructuring.Cash As at 28 February 2011, the Group had cash, cash equivalents and restricted cash of £31 million (28 February 2010: £39 million). Debt & Gearing Overall debt level, which includes OLNs, CULS and ZDPs, amounted to £1,733 million at 28 February 2011. Bank loans amounting to £1,029 million have matured or will mature during the next twelve months. However, the successful completion of the recent balance sheet restructuring, which resulted in the equitisation of debt owing to the holders of the CULS and the ZDPs into shares in REO and the newly formed Battersea shareholder vehicle, BPSSV, will reduce financial indebtedness to £1,499 million.The Group continues to work closely with other lenders, which exist outside NAMA’s remit, to renew debt facilities where required.Going Concern The Group’s future operating performance will be affected by general economic, financial and business conditions, many of which remain beyond the Group’s control. At 28 February 2011, the Group’s borrowings totalled £1.73 billion and in addition there were interest and finance accruals of £67.7 million. At that date, the Group had an investment and development portfolio which it valued at £1 billion, together with cash and cash equivalents of £5.7 million, and restricted cash of £25.8 million. The deficit on shareholders’ funds was £801 million. At 28 February 2011, the Group had aggregate bank loans of £1.03 billion classified as current liabilities. In addition, the Group had obligations of £380 million due to the holders of its CULS, ZDPs and the OLNs, all of which were due to mature in May 2011. The liabilities due to holders of the CULS and ZDPs amounted to £100.9 million and £133.1 million respectively, with a principal amount of £146.3 million due to the holder of the OLNs at 28 February 2011. Interest payments of £7.6 million and £17 million due at 28 February 2011 to the holders of the CULS and OLNs respectively were not made at this date. Based on its current financial position, and as previously announced, the Group would have been unable to repay those instruments on their maturity. However, as of 12 May 2011, the Group has successfully completed a financial restructuring of these liabilities which also enables the transfer of the Battersea Power Station asset into the newly formed entity, BPSSV. The terms of the financial restructuring include the deferral of all principal and interest payments due on the OLNs until 31 August 2011 and the novation of those liabilities into BPSSV. The restructuring involves an equitisation of the CULS and ZDPs into equity in BPSSV and REO. The Group has also renegotiated the loan facilities relating to Battersea Power Station with both Lloyds Banking Group (previously Bank of Scotland) and NAMA (previously Bank of Ireland), extending the existing facility to 31 August 2011. Currently, these facilities can be called on demand. The Group submitted a comprehensive business plan in May 2010 for review by NAMA. The initial evaluation process resulted in a signed Memorandum of Understanding (“ MOU” ) in December 2010, the terms of which are non-binding. The terms include the consolidation and renewal of loan facilities and the provision of working capital. NAMA will monitor the Group’s subsequent performance to ensure that it adheres to targets contained in the MOU and, subject to further negotiations, binding facility agreements are expected to be entered into in the near future.The key assumptions made in preparing the Group’s cashflow for the period to 22 June 2012 include:
The Group may also investigate the possibility of raising further capital after its debt facilities have been renegotiated and its interest in Battersea Power Station has been restructured. Based on the Group’s current cashflow and the key assumptions noted above, the Board believes that the Group will have sufficient cash and cash equivalents to meet its liquidity requirements for at least twelve months from the date of approval of this report.The Directors of the Company have concluded that the above factors represent material uncertainties. Failure to achieve the above assumptions and objectives could cast significant doubt on the Group’s ability to continue as a going concern and it may therefore be unable to realise its assets and discharge its liabilities in the normal course of business.However, having discussed the assumptions and basis of preparation supporting the Group’s cash flow projections, together with the advanced status of negotiations with the Group’s key lenders, along with the progress made in restructuring of the Group’s Balance Sheet and the significant progress made towards securing planning permission on Battersea Power Station, the Directors of the Company have a reasonable expectation that the Group will be able to meet its liabilities as they fall due for the foreseeable future. On this basis, the Directors consider it appropriate to prepare the financial statements on a going concern basis. No adjustment which would result from a change in the going concern basis of preparation has been included in the financial statements. PRINCIPAL RISKS AND UNCERTAINTIESThe principal risks and uncertainties that face the business include the following: Economy The global banking crisis and economic slowdown has had a significant negative impact upon Ireland’s economy which, since last 2008, has suffered the largest contraction in gross domestic product of any developed country. Recent concerns over Ireland’s banking system and government finances have led to increasing yields on Irish sovereign debt and have curtailed the Irish government’s ability to borrow in the international money markets. This culminated in the Irish government approaching its European Union partners and the International Monetary Fund in late November 2010 to request financial assistance. On 1 December 2010, the Irish government published the EU/IMF Agreement Document detailing an • 85 billion assistance programme to support the Irish banking system and provide ongoing financial support to the Irish state. The provision of the assistance programme is conditional upon the Irish government implementing austerity measures including spending cuts and tax increases aimed at lowering Ireland’s budget deficit. These spending cuts and tax increases may impact upon future economic growth in Ireland, the outlook for which remains negative.The concentration of the Group’s property portfolio in Ireland means that the Group is particularly exposed to the ongoing weakness of the Irish economy and its impact upon Ireland’s property market. Lower tenant demand, failure to renew expiring leases, tenant defaults and falling demand for development assets will continue to pose a material risk to the Group’s business, operational results and financial health. Liquidity Despite the recent successful completion of the balance sheet restructuring, the Group is reliant upon the ongoing support of NAMA and other lenders, which will continue until one or more of the following key initiatives have been concluded:
Failure to successfully complete such initiatives and/or renew bank facilities expiring in the next twelve months would have material adverse consequences for the Group, thereby casting doubt on its ability to continue as a going concern. Financial sector – Lenders & NAMA As noted above, the ongoing Irish economic crisis, culminating in the EU/IMF assistance programme, has curtailed the ability of both the Irish government and the Irish banking system to borrow funds in the international money markets. Therefore, liquidity remains largely absent from the market.The Group’s ability to raise funds for development activity on favourable terms depends on a number of factors including general economic, political and capital market conditions and credit availability from commercial lenders. Another global liquidity crisis could significantly increase the cost of available funding or lead to serious difficulties in refinancing the Group’s current debt levels. The Group could also be forced to sell further assets, which may not be under the best conditions, in order to meet payment obligations.Property Valuations & NAV The severe recession in the Irish economy has been accompanied by significant falls in the value of properties across the Irish market. Continuing inactivity in the Irish property market, the potential enactment of retrospective abolition of upward only rent reviews on existing leases and the ongoing absence of new lending facilities, has also led to difficulty in conducting realistic property valuations. Ongoing volatility in the global financial system has created a significant degree of turbulence in commercial real estate markets on a worldwide basis. Furthermore, the lack of liquidity in the capital markets means that it may be very difficult for the Group to achieve further property sales in the short-term.Further potential declines in the value of the Group’s portfolio may result in a further reduction to shareholders’ funds, which currently show a deficit of £801 million – the effect of the recently completed balance sheet restructuring will see this deficit reduce to £559 million. The consolidated net deficit of the Group under the EPRA guidelines is £718 million at 28 February 2011 (28 February 2010: net deficit of £595 million).Interest Rates Interest costs represent a substantial expense to the Group, which uses interest rate swaps to manage its exposure to fixed and floating rates. The continuing difficulties experienced in the banking sector and scarcity of credit may result in lenders seeking increased margins and there is a risk that future interest costs may be higher. If the Group fails to meet margin calls under such interest rate swaps it may be precluded from using interest rate swaps to manage its exposure. Approval of Preliminary Announcement The financial information contained in this preliminary announcement is not the statutory financial statements of the company, drawn up in accordance with the Companies (Jersey) Law 1991 (as amended). The Directors approved the preliminary announcement in respect of the financial year ended 28 February 2011 on 22 June 2011. We understand that our auditors, KPMG, will be drawing attention as an emphasis of matter without qualifying their report with regards to disclosures in Note 2 (a). |
