Investment Adviser’s Report

Investment portfolio
The investment portfolio continues to perform well, especially in light of current market conditions. Annualised rent roll was €48.3 million in the period compared to €46.8 million as at 31 December 2008. Portfolio occupancy remains at over 90% and only 3.75% of rent roll is in arrears, which has remained broadly stable in the period. The Company continues to monitor its tenants closely and to date there have been no material indications of defaults. Blue chip tenants such as Vodafone, Merrill Lynch, KPMG and Marks & Spencer account for over 63% of the portfolio by rent. Rent weighted average lease length is approximately 11 years. Given the market environment, this performance is impressive, with intense asset management driving cash flow.  This continued strength of operational performance is also underpinned by prime office and retail locations and high quality tenants.

During the period, 12 upward only rent reviews were completed achieving an average increase of 6% on passing rent, with €13.9 million of income reviewed. In particular, the Company successfully completed a rent review with REO’s largest tenant by rent, Vodafone (Central Park, County Dublin), at €7.2 million per annum, or 12% above previous passing rent. The new rent is effective from October 2006. The Vodafone lease in Central Park is Ireland’s largest single let building at 263,000 square ft and now expires in 2026.

Two other rent reviews were also recently completed in Central Park with Tullow Oil plc, achieving an average increase of 12.8% on passing rent.

In addition, the Group completed a rent review with Bank of Ireland Asset Management (40/42 Mespil Road) in January 2010, resulting in a 9% increase on the previous rent.

Development portfolio
The Company has taken a prudent approach to the timing of its development pipeline, with construction in progress on only one development project. While negotiations are ongoing with NAMA regarding the proposed plans for development properties, including flexibility on start dates, the Company continues to pursue appropriate planning permissions to position the Group for the longer term when the market stabilises and funding becomes more available.

Battersea Power Station
As the Chairman’s statement has stated, the Company lodged the largest planning application ever submitted in central London in September 2009. Initial consultation to the application has been very encouraging, with English Heritage, The Commission for Architecture and the Built Environment and The Greater London Authority and many others supporting the project in principle. We therefore remain very optimistic that the application will be determined favourably later this year.

We are also pleased to announce that new lending terms have been negotiated (subject to completion of legal documentation) with both Lloyds Banking Group (previously Bank of Scotland) and NAMA (previously Bank of Ireland) whereby the existing Battersea Power Station bank facility is to be extended and all outstanding breaches waived. In addition, the Company is undertaking a global investment roadshow to attract a long term equity partner into the project following receipt of planning permission. Due to the quality of the development, the prime location and the strengthening real estate investment market in London, interest has been very encouraging and we hope to announce significant progress in this regard later in the year.

To facilitate such investment in the Company and the project, the Board has resolved to pursue a proposal to separate the Battersea Power Station project from the remainder of the REO portfolio into a new separate listed vehicle. This important step will help facilitate the necessary equity investment required to develop the project plus also enabling refinancing and restructuring of all the existing liabilities towards new longer term, development based arrangements. The Board also believes that this is extremely positive for stakeholders as the newly formed vehicle will give relevant stakeholders substantial exposure to this unique development project. Subject to the support of the stakeholders, it is hoped this new listing could be achieved before the end of the calendar year.

Irish Development Portfolio
Progress within the Irish development portfolio in the period includes:

Central Park
The Company secured planning permission for an additional office building (13,700 square metres) within its Central Park development, one of REO’s most established suburban developments, currently tenanted by companies including Vodafone, Merrill Lynch, First Active and Vivas Healthcare. Central Park, which is strategically located beside the M50 between Sandyford and Leopardstown, offers a convenient out of town suburban location with excellent public transport links including easy access to the N11 and the Luas (Light Rail Tram System) Green line.  Central Park’s own Luas stop is due to become operational this year. Construction of Number 1, Central Park, a 17,650 square metre office development, has been completed but will exclude fit out until a pre-letting is secured. We continue to aggressively market this new building and we have recently made formal submissions for four live enquiries.

Montevetro
There is only one REO development currently under construction: Montevetro, on Barrow Street, Dublin 4 (19,500 square metres) and the building continues to be constructed. The cladding is due for final weather-tight by the end of June 2010. We continue to market the building, with a number of live enquiries being addressed currently. The building has direct access to its own DART commuter train station.

Valuations
The total property portfolio value was £1,097 million as at 28 February 2010, down 43% from the 31 December 2008 valuation of £1,910 million. This decrease in the portfolio valuation is due to an average decline of 51% in values across the Irish portfolio in the 14 months to 28 February 2010. This decline is broadly in line with market-wide declines in values in Ireland as the market continued to suffer from the biggest contraction of any developed economy as well as severe instability in its banking sector in the period.

REO’s UK portfolio includes Battersea Power Station which represents 89% of the UK portfolio by value. The Power Station fell 4% in value for the 14 months to 28 February 2010 to £388 million, however it increased by 6% in the 8 months from June 2009 from £365 million, as the UK market began to show signs of recovery.

Financial review
In November 2009, the Company announced a change in its accounting year end date from 31 December 2009 to 28 February 2010. This was to coincide with the establishment of NAMA and the expected transfer of a number of REO loans and to enable the Company to present REO’s financial position more clearly to shareholders.

Valuations & Net Asset Value (“NAV”)
The value of the portfolio as at 28 February 2010 amounted to £1,097 million, a reported decrease of 43% since 31 December 2008, and a decrease of 32% since 30 June 2009.

The deficit on the consolidated shareholders funds at 28 February 2010 is £722 million.

The consolidated net deficit of the Company under the EPRA guidelines is £595 million at 28 February 2010 (31 December 2008 EPRA Net Assets: £347.5 million).

Diluted EPRA deficit per share was -178.2p as at 28 February 2010, representing a significant reduction from 104.1p at 31 December 2008 and from 30.9p at 30 June 2009.

Profit & Loss
Property income amounted to £44 million in the 14 months to 28 February 2010, representing an increase from £32 million in the prior year 12 month period, due to rental income from the additional two month period and the completion of upward rent reviews in the period. After valuation losses and operating expenses, the reported operating loss was £816 million. Net financial expenses were £112 million in the period. This resulted in a REO loss after taxation for the period of £828 million including an income tax credit of £101 million.

Debt & Gearing
Bank loans amounting to £1,072 million and £312 million mature during 2010/2011 and 2011/2012 respectively.
The overall debt level is £1,720 million, including loan notes, Zero Dividend Preference Shares and Convertible Unsecured Loan Stock.

Loan Instrument Restructuring Discussions
As part of its balance sheet restructuring, preliminary discussions have commenced with certain key holders of loan instruments supporting the business – CULS, ZDPs and the Oriental Loan Note – with a view to agreeing a consensual restructuring of the Group’s Balance Sheet prior to their repayment date on 31 May 2011. The Board has appointed a restructuring adviser, Talbot Hughes McKillop, to assist in these negotiations.

NAMA
The Company received formal notification from NAMA in March 2010 that it was to acquire certain of REO’s loans. These loans are from Allied Irish Bank, Anglo Irish Bank, Bank of Ireland, and Irish Nationwide and amounted to £815 million of a total of £1.49 billion of the Company’s outstanding bonds and loans. They were transferred to NAMA during April and May 2010. Since then, the Company has submitted its comprehensive business plan to NAMA and is in negotiations regarding the renewal and/or renegotiation of these loans. We remain confident that NAMA will be supportive of the REO portfolio, due to the quality and location of the Group’s development sites as well as its income producing assets.

In relation to non-NAMA debt, although bank finance continues to be very limited, we are continuing to work closely with our existing lending banks to renew debt facilities where necessary.

The Board is pleased to announce that the outstanding waiver relating to the NAV covenant breach on the Battersea Power Station bank facility of £226 million with Bank of Scotland and Bank of Ireland (now NAMA), has been approved subject to completion of legal documentation. New terms have also been negotiated (also subject to completion of legal documentation) whereby the facility is to be extended until August 2011.

Cash
As at 28 February 2010, the Group had cash, cash equivalents and restricted cash of £39 million, which excludes the disposal of its stake in CREO, which occurred after year-end.

Sale of Investment in Associate
In March 2010, the Group announced it had disposed of its effective 16.9% stake (8,387,941 shares) in CREO, the property company with an established investment and development property portfolio in China, for a cash consideration of £27.68 million. The sale is in line with the Group’s strategy to focus on its core portfolio and the proceeds will be used for general working capital purposes.

Going concern
At 28 February 2010, the Group had total borrowings of £1.721 billion.  At that date, the Group also had cash and cash equivalents of £21.1 million, restricted cash of £17.7 million and an investment in CREO of £27.7 million which was realised in cash subsequent to the year end.  The Group has an investment and development property portfolio valued at £1.1 billion and had a deficit on its shareholders’ funds of £722 million. 

The Group’s future operating performance will be affected by general economic, financial and business conditions, many of which are beyond the Group’s control.

At 28 February 2010, the Group had aggregate bank loans of £923 million classified as current liabilities.  In addition, the Group had aggregate obligations of £371 million due to the holders of its Convertible Unsecured Loan Notes (CULs), its Zero Dividend Preference shares (ZDPs) and the 6.324% Series A and B unsecured loan notes.  All of these instruments mature in May 2011 and based on the Group’s current financial position, the Group does not have the ability to repay those instruments on their maturity in May 2011. 

Each of the CULs and ZDPs mature in May 2011.  The liability at 28 February 2010 in respect of the CULs and the ZDPs is £101 and £122 million respectively.  In the case of the CULs, interest is paid every six months in the amount of £3.8 million and the next interest payment is due in August 2010.

The Series A and Series B unsecured loan notes in the aggregate amount of £147.8 million mature in May 2011.  Interest at the rate of 6.324% per annum is payable half yearly and the next interest payment due date is 31 August 2010 in the amount of £5.0 million.

As required by NAMA, the Group has submitted a detailed business plan which is currently being evaluated by NAMA with a view to seeking its approval of that plan.  This evaluation process is currently underway and the Directors believe that the plan will be approved following which NAMA will monitor the Group’s subsequent performance to ensure that we adhere to the targets contained in the business plan.  Whilst initial communications between NAMA and the Company support the Directors’ belief that NAMA will work alongside the Company’s other banks to provide support to the operations of the Group, no formal approval of the Group’s business plan has been received at this time. 

The Battersea Power Station is a major development project in central London. The development costs are currently funded 75% by a consortium of lenders, with the balance financed by the Group.  The lenders are currently providing interest roll up on the existing debt.  The Battersea facilities expire in March 2011 and in preparing the Group’s business plan, the Directors have assumed that these facilities will be rolled over and renewed on broadly similar terms or alternatively will be re-financed on broadly similar terms. This has been approved by the banks’ credit committees but is now subject to the completion of legal documentation.

The key assumptions made in preparing the business plan for the Group for the period to 30 June 2011 include:

• The acceptance by NAMA of the Group’s business plan.
• The renewal by NAMA of bank facilities in the amount of £815 million on broadly similar terms.
• The agreement of NAMA to defer interest payments.
• The provision by NAMA of working capital facilities.
• The agreement of the holders of the CULS and Series A and Series B loan notes to a standstill on the payment of interest in the period to June 2011.
• Agreement with each of the holders of the CULS, ZDPs and Series A and B notes whereby the capital amounts due on maturity in May 2011 will not represent a cash outflow for REO.
• Certain of the Group’s fee arrangements with Treasury will be restructured to cap the fees paid in the period to June 2011.
• Planning permission for the proposed development of Battersea Power Station will be granted in 2010.
• It is anticipated the Group’s interest in Battersea will be restructured and that an equity partner will be introduced on the Battersea development providing all project financing from January 2011.

Based on the Group’s business plan and the key assumptions noted above, the Directors believe 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 the financial statements.

Following the anticipated Battersea restructuring, the Group will continue to have a deficit on its shareholders’ equity and, as a consequence, it is anticipated that the Group will require ongoing financial support from NAMA and its non NAMA lenders in the period beyond June 2011.

The Directors of the Company have concluded that the above factors represent material uncertainties.  Were the assumptions and objectives not to be achieved, it could cast significant doubt on the ability of the Group 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.  Nevertheless, having discussed the basis of preparation and the assumptions underlying the Group’s cash flow projections, together with the current status of negotiations with NAMA and the Group’s other lenders, and assuming the roll over and renewal of expiring facilities and required further waivers are put in place within the required time scales, 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.  It is on that basis that the Directors consider it appropriate to prepare the financial statements on a going concern basis.  These financial statements do not include any adjustment that would result from the going concern basis of preparation being inappropriate.                

Outlook
The fallout from the global economic downturn in 2008-2009 and Ireland’s own difficulties in both the economy and banking sector have continued to impact the performance of the business severely, as evidenced in this set of results and the net deficit position. However, the Company has taken some important steps in the period to address the Company’s financial position and restructure its balance sheet. While much work remains, the Board remains committed to navigating these challenges to deliver maximum share holder value over the long term.

Approval of Preliminary Announcement
The financial information contained in this preliminary announcement are 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 period ended 28 February 2010 on 22 June 2010.

We understand that our auditors, KPMG, will be drawing attention as an emphasis of matter without qualifying their report with regards to the disclosures in note 2 (a).