(OTE) O Twelve Estates

CHAIRMAN'S STATEMENT

I am pleased to present the Group's results for the six months ended 30 September 2011.

At 30 September 2011, the Group's investment property portfolio was valued by CB Richard Ellis ("CBRE") at £158.2 million (31 March 2011: £158.5 million), an increase of 0.3% on a like-for-like basis, although after taking into account capital expenditure during the period the value remained static. The rental value of the portfolio increased by 0.2% in the six months ended 30 September 2011, matching the Investment Property Databank ("IPD") All Property Monthly Index over the same period.

During the period there was a partial disposal of two units at Larkfield Mill in Aylesford for a total consideration of £725,000.

During the period, the Group accepted a lease surrender from the tenant of Western Avenue, Thurrock. The tenant, then the Group's largest with an annual rental of £800,000, had been in serious financial difficulty and it was felt that the best course of action would be to accept a surrender of its lease, subject to payment by the tenant of £262,500, rather than pursue a claim after an insolvency event.

Results

The Group reported a net loss for the six months ended 30 September 2011 of £3.7 million (30 September 2010: loss of £5.9 million, 31 March 2011: loss of £8.6 million), representing a loss per Ordinary Share of 0.78p (30 September 2010: loss of 4.78p, 31 March 2011: loss of 4.64p). A significant contributor to the loss was the adverse movement in the mark to market of interest rate swaps of £3.4 million.

The consolidated net assets at 30 September 2011 were £36.3 million (30 September 2010: £7.6 million, 31 March 2011: £40.1 million), representing net asset value per Ordinary Share of 7.56p (30 September 2010: 6.18p, 31 March 2010: 8.34p).

Financing

On 9 May 2011, the Group announced that the fixed rate hedging arrangement on £26 million of loan principal had been broken and reset to variable rates at a one-off cost of £3 million.

The loss of the tenant at Western Avenue had a negative impact on the interest cover ratio ("ICR"). However, this was offset by the reduction in interest cost following the hedging break and the thirteen new leases which were contracted in the period, accounting for 45,000 sq ft of space and £0.7 million of rental income after rent free periods.

Following the above, the interest cover ratio ("ICR") under the loan facility improved from 117% as at 25 April 2011 to 135% as at 25 October 2011 against a current default level of 105%. The loan to value ratio ("LTV") at 30 September 2011 remained unchanged from 31 March 2011 at 71% which is satisfactorily below the default level of 85%.

The loan principal outstanding at 30 September 2011 was £124.8 million, with £12.8 million of the Group's cash balances being held on blocked deposits over which the lenders have security. In October 2011, £5.9 million of cash held on blocked deposit was applied in partial repayment of the loan principal. As LTV under the loan facility is calculated after deducting the blocked deposits, this had no effect on LTV, but will have a small positive effect on ICR. At 30 September 2011, cash balances freely available to the Group amounted to £4.9 million.

Dividend

The Board does not recommend the payment of an interim dividend (31 March 2011: nil).

Future Prospects

The Board believes that the resolution passed at the Annual General Meeting to extend the Group's Target Area is a positive step, which will enable the Group to take advantage of projects and acquisitions outside the original Target Area that it believes will add shareholder value. However, in the present unfavourable economic and financial climate, the Directors do not expect the Group's lenders to approve new acquisitions or projects other than those which would directly benefit existing assets. For the foreseeable future it must, therefore, be assumed that the greater part of any realisation proceeds will not be reinvested and will be applied in paying down the loan facility.

Your Board and its advisers have examined the strategies available to the Group and believe that the interests of shareholders are best served by continuing to unlock the latent value within the portfolio through proactive asset management. Assets will be realised when the Board believes that they have achieved their optimal values, given the particular circumstances of each individual property. The balance of the Group's properties will be disposed of by the end of the loan facility term in 2016. All disposals will take into account the impact on loan covenant compliance at that time. It is your Board's intention that the majority of any realisation proceeds will be applied against debt as required and that any cash surplus, after considering the Company's overall financial position, will then be distributed to shareholders.

The Directors do not believe that it is in shareholders' interests to use freely available cash resources to break the Group's existing fixed rate loans. Earlier property realisations will, therefore, be limited to the outstanding debt not subject to these arrangements (£30 million at 9 December 2011). The adverse mark to market of fixed rate loans, amounting to £15 million as at 30 September 2011 should, assuming current circumstances continue, be allowed naturally to reduce to zero over the remaining loan term. This alone would increase net assets attributable to shareholders by 41% over the period.

In light of current market conditions and its realisation plan for the next few years, your Board is reviewing all aspects of the Group's operations to minimise costs over the period. This involves consideration of all management and advisory arrangements and the Group's tax residency and status. This review will be completed by the end of this financial year.

The Board has confidence in the ability of the Group's London and South East based property portfolio to withstand the continuing uncertain economic environment. Whilst the Group's debt position presents ongoing challenges, the current loan terms and relatively high gearing would be very difficult to achieve for a new borrower today, and as a result of our leveraged position, any growth in capital values over the next few years will enhance shareholder returns significantly.

Phillip Rhodes

Chairman

PROPERTY ADVISER'S REPORT

Rugby Asset Management

Rugby Asset Management Limited ("RAM"), a member of the Rugby Estates Plc group, was appointed Property Adviser to O Twelve Estates on its admission to AIM on 27 March 2006.  Our role is to identify transactions for recommendation to and consideration by the Board of O Twelve and to negotiate on its behalf.  We undertake, on a day to day basis, under delegated authority from the Board, all aspects of assembling, managing and financing O Twelve's property portfolio.  The Rugby Estates Plc group holds a 1.6% interest in O Twelve Estates Limited.

Market Comment

In the six months to September 2011, UK commercial property capital values generally continued to increase, albeit at a sluggish pace.  The IPD Monthly Index showed a marginal increase of 0.6% over the period.  The uncertainty over the Eurozone debt crisis, however, continues to undermine confidence and it is difficult to see any meaningful economic growth in the short term.  Investor perception of risk is of paramount importance and the divergence between prime and secondary property remains.  London and the South East remain the preferred locations for investors and this bodes well for the Group's portfolio, which is wholly located in the South East.

The property to bond yield spread, at approaching 400 bps, remains high but, in our view, reflects the nervousness on occupational demand over the next few years.  One of our principal asset management aims continues to be to maximise cash flow with a particular focus on minimising voids and reducing associated property outgoings.  Over the period we have completed thirteen new leases producing a contracted rental income of £0.7 million per annum.  In the 31 March 2011 Annual Report, we noted that the void level within the portfolio had fallen to 7.7%.  Since then, we have accepted a surrender of the lease at our distribution unit at Western Avenue, Thurrock which increased the Group's void rate to 13.2% as at 30 September 2011.  The tenant company was in financial difficulty and, after a detailed review of its position, it was felt that the best course of action would be to accept a surrender payment of £262,500 from them rather than pursue a claim after an insolvency event.

Portfolio Review as at 30 September 2011

·      Valuation £158.2 million

·      20 properties

·      Average lot size of £7.9 million

·      Contracted annual rental income of £11.6 million

·      Estimated rental value ("ERV") of £13.5 million per annum, thus indicating additional potential rental income from reversions and letting vacant units of £1.9 million per annum

·      176 separately lettable units*

·      142 units are let to 127 tenants*

·      34 units are vacant and available for letting with an ERV of £1.8 million per annum *

·      30% of income is from leases with more than five years to expiry

·      Weighted average unexpired lease term is 5.3 years

* Excluding long leasehold ground rents, assured shorthold tenancies and other miscellaneous income.

Capital Value Split by Sector as at 30 September 2011

Valuation

The external valuation of the Group's properties as at 30 September 2011 was £158.2 million (31 March 2011: £158.5 million).  On a like-for-like basis, the value of the portfolio increased by 0.3%, but remained static having taken capital expenditure during the period into account. This compares with the IPD Monthly Index, which showed a minimal rise of 0.6%.  The equivalent yield for the portfolio remained stable over the period at 7.5%.  This compares with the IPD Monthly Index which showed an equivalent yield of 7.2%, a compression of 10 bps over the same period.

A comparison of the capital value movement of the Company's portfolio against the IPD Monthly Capital Value Index is shown below.

Capital Value Movement compared to IPD Monthly Index (March 2011 to September 2011)

Rental values within the portfolio have generally moved in line with the IPD Monthly Index and increased by 0.2% over the period.  Both the industrial and retail sectors performed better than IPD with falls of 0.1%.  Office rental values within the portfolio remained stable.

Rental Value Movement compared to IPD Monthly Index (March 2011 to September 2011)

Activity

There were no material sales or acquisitions during the period, with only a partial disposal of two units at Larkfield Mill in Aylesford, which realised £725,000. 

Our focus has continued to be on asset management and we are pleased to report that thirteen new leases were contracted over the period, accounting for 45,000 sq ft of space and £0.7 million of annual rental income after rent free periods.  Some of the key progress is highlighted below:

·      Queensgate, Waltham Cross: Telford Homes have completed a new 10 year lease without break on 19,500 sq ft of office space. 

·      The Mall, Dagenham: Five leases have completed accounting for £146,800 per annum of contracted rental income after rent free periods.

·      Units 1-4 Mill River Trading Estate, Enfield: Refurbishment works to these four units have now completed and terms have been agreed with our existing tenant, Edmundson Electrical, to extend their lease on Unit 1 and also to take a new lease on the newly refurbished Unit 2.

Rental Value Analysis as at 30 September 2011

Void Analysis

The income from Western Avenue, Thurrock accounted for 6.5% of the contracted rent for the portfolio and consequently, as a result of the lease surrender, the void rate has risen from 7.7% at 31 March 2011 to 13.2% at 30 September 2011.  The rental value of vacant space at 30 September 2011 was £1.8 million in 34 lettable units.  During the coming year our focus will continue to be on reducing the void rate and minimising associated void costs.

Income Security

Given the continuing uncertainty in the economy and in the wider banking and financial markets, investors are increasingly focusing on security of income and tenant covenant strength.  Some 30% of current rental income is contracted for more than five years.  Where leases have less than five years to run, opportunities exist to refurbish or consider changes of use in order to maximise value.  In our view, the portfolio offers a good balance between income security and opportunities to add value.

Rent Collection

Maintaining a high level of rent collection remains one of our priorities.

Rent collection for the most recent quarter (September 2011) stands at 97%, an increase from the collection rate of 90% in the March and June quarters, which was reduced principally due to the non-payment of rent by the tenant at Western Avenue, Thurrock. The tenant had been in serious financial difficulty and in August 2011 a surrender of their lease was agreed, on payment by the tenant of £262,500.

Income Expiry Profile as at 30 September 2011

Of the portfolio's 127 tenants, 20 account for 56% of the contracted rental income with the top 10 accounting for 40%.  Tenants of, in our view, a very strong or "national" standard account for 84% of the contracted rent, while smaller regional and local businesses account for 16% of the contracted rent. 

Tenants in the portfolio include:

Portfolio at 30 September 2011

Outlook

With Government measures to reduce the budget deficit ongoing and the Eurozone debt crisis unresolved, the occupational market is certain to remain challenging for the near term.  The focus of the portfolio in the London/South East area generally and on the "Olympic" side of London in particular should mitigate the impact if there is a prolonged period of economic stagnation.

On a more positive note, there are clear opportunities to create additional value within the portfolio from asset management initiatives and these are actively being pursued.

David Tye

Andrew Wilson

Rugby Asset Management Limited