LXi REIT — Organic growth drivers with external opportunities

LXi REIT (LSE: LXI)

Last close As at 21/05/2024

GBP1.01

0.00 (0.00%)

Market capitalisation

1,729m

More on this equity

Research: Real Estate

LXi REIT — Organic growth drivers with external opportunities

LXi REIT reported strong FY23 income results and well-covered dividend growth, driven by the economies scale generated by its successful merger with Secure Income REIT (SIR) and rental growth. We expect this to continue. Asset management, rent growth and portfolio positioning all mitigated the capital impact of market-wide weakness in property values.

Martyn King

Written by

Martyn King

Director, Financials

Real Estate

LXi REIT

Organic growth drivers with external opportunities

FY23 results

Real estate

18 July 2023

Price

90p

Market cap

£1,543m

Net debt at 31 March 2023

£1,176m

Net LTV at 31 March 2023*

35.6%

*Net debt divided by portfolio value excluding leasehold assets. LXi pro forma LTV, adjusted for capital commitments, 37%.

Shares in issue

1,714.5m

Free float

86%

Code

LXI

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(6.3)

(14.2)

(38.1)

Rel (local)

(3.2)

(9.0)

(39.6)

52-week high/low

154p

83p

Business description

Enlarged by the July 2022 merger with Secure Income REIT, LXi REIT selectively invests in commercial property assets let, or pre-let, on very long, inflation-linked, triple net leases to a wide range of strong tenant covenants across a diverse range of robust property sectors. It aims to provide a secure and growing income, supported over the medium term with capital growth, with a total return target of at least 8% pa.

Next events

H124 period-end

30 September 2023

Analyst

Martyn King

+44 (0)20 3077 5700

LXi REIT is a research client of Edison Investment Research Limited

LXi REIT reported strong FY23 income results and well-covered dividend growth, driven by the economies scale generated by its successful merger with Secure Income REIT (SIR) and rental growth. We expect this to continue. Asset management, rent growth and portfolio positioning all mitigated the capital impact of market-wide weakness in property values.

Year end

Net rental income (£m)

Adjusted ‘cash’ earnings* (£m)

Adjusted
‘cash’ EPS* (p)

NAV per
share** (p)

DPS
(p)

P/NAV
(x)

Yield
(%)

03/23

198.2

100.4

6.7

121.1

6.30

0.74

7.0

03/24e

245.1

118.4

6.9

123.6

6.60

0.73

7.3

03/25e

250.2

122.1

7.1

128.8

6.85

0.70

7.6

03/26e

253.3

126.9

7.4

135.4

7.05

0.66

7.8

Note: *Adjusted for gains/losses on investment properties, other fair value movements and licence fee income on forward funding extended, and excludes non-cash IFRS adjustments that are included in IFRS and EPRA earnings. **Throughout this report, NAV is EPRA net tangible assets (NTA).

Successful merger

The merger completed in July 2022, contributing for less than nine months in FY23, yet adjusted cash EPS increased 18%, covering DPS (+5%) by 1.06x. EPRA EPS increased by 36%. The EPRA cost ratio of 9.5% is one of the lowest in the UK real estate investment trust (REIT) sector and is yet to fully benefit from merger savings. Combined with continuing rental growth, and protected by completion of the comprehensive debt refinancing, this is supporting continued progressive distributions. The previously announced FY24 DPS target is 6.6p, up a further 5%. The debt refinancing extended the average debt maturity to six years, attractively priced at a fixed 4.7%. The 9.6% like-for-like decline in portfolio value compared favourably with the c 17% decline indicated by MSCI data, and EPRA NTA per share was 15% lower at 121.1p. On a pro forma basis, LTV is 37%, but assuming flat property yields, LXi says this would fall below 34% within 24 months with rental growth alone. Our forecast for FY24 adjusted cash EPS is increased by 3%, providing DPS cover of 1.05x.

Significant further opportunities

The merger created the UK’s leading multi-sector, diversified, long index-linked income REIT. With 98% of rents subject to fixed or index-linked, upward-only increases, LXi offers significant income protection against inflation, and a 27-year unexpired lease term and strong tenants further add to income visibility. The existing portfolio continues to offer significant asset management and capital recycling opportunities. Meanwhile, the increased scale of the business leaves it well placed to benefit from future external growth opportunities, including asset sales from open-ended funds and pension schemes, corporate sale and leasebacks, and sector consolidation.

Valuation: Attractive yield & fully covered DPS growth

LXi offers an attractive prospective 7.3% FY24e dividend yield with strong prospects for continuing fully covered DPS growth. Meanwhile the shares trade at 0.74x FY23 net asset value (NAV), compared with an average c 1x since listing in 2017.

Organic growth drivers with external opportunities

We expect a full contribution from the merger, including cost efficiencies, and contracted rental uplifts to drive further organic growth in earnings and dividends. Although not included in our forecasts, the company expects its substantial scale to additionally support ongoing asset management activity within the portfolio and provide opportunities for external growth. The existing portfolio is diversified in nature, with a focus on assets that are ‘mission critical’ to tenants, in defensive sectors, with a stable outlook and high barriers to entry. Combined with fixed-cost funding, we believe the portfolio should provide protection against a worse UK economic performance than is captured by consensus economic forecasts.

Contracted rent growth

98% of contracted rents are based on inflation indexed (26% RPI/38% CPI), 60% of which are capped at an average 3.9% pa, or fixed (34%) uplifts. Annual reviews apply to 56% of leases with 44% reviewed every five years. The portfolio is fully let and all leases require full repairing and insuring by the tenant, providing protection from property cost leakage and capital expenditure requirements. In each of the next two years, LXi expects 61% of contracted rents to renew, and for this to increase in the following years as the timing of five-yearly reviews has a greater impact.

Exhibit 1: Expected renewals as % contracted rents

Annual

Five yearly

Total

FY24

56%

5%

61%

FY25

56%

5%

61%

FY26

56%

11%

67%

FY27

56%

10%

66%

FY28

56%

9%

65%

Source: LXi

Asset management and capital recycling

Asset management and capital recycling remain core elements of LXi’s organic growth strategy post-merger, and the company expects enhanced opportunities as a result of its increased scale. During H223 it completed two key innovative transactions, both covered in our March outlook note, in the Merlin ‘income strip’ transaction and re-gear of the Travelodge portfolio, and sees good opportunities to create further value through lease re-gears, strengthening relationships with key tenants and other asset management initiatives.

Capital recycling is a route to rebalancing portfolio exposures and optimising capital deployment towards the most promising areas. In early June, LXi completed the profitable sale of a retail park for £31m, reflecting a yield of 4.7% compared with its portfolio average of 5.4% at end-FY23. The property had been acquired as a forward funded development in 2019 for £24m and the sale crystalised an 11% internal rate of return. The proceeds will initially reduce gearing but may also be partially reinvested in a high yielding pipeline of opportunities.

External opportunities

The company has identified a significant pipeline of opportunities to acquire prime, long-income assets as a result of structural change within the open-ended funds sector. It also expects ‘cliff edge’ refinancing events for corporates, as existing low-cost bonds mature, to be a source of new sale and leaseback opportunities.

LXi also anticipates opportunities to participate in REIT consolidation and M&A in the long-income market, leveraging its scale and cost efficiency and taking advantage of wide discounts that have emerged with asset repricing, leaving some players with sub-scale platforms.

Further diversification opportunities

As at end FY23, the portfolio comprised 350 properties across 13 property subsectors with multiple underlying uses, let on very long leases, averaging 27 years, to more than 80 separate tenant operators on low and sustainable rents.

Exhibit 2: Portfolio summary at end-FY23

Rent

Valuation

WAULT
(years)

Indexed/fixed rent uplifts

Sub sector

£m pa

Share of total

£m

Share of total

Healthcare

45.2

22%

917.0

27%

16.0

100%

Budget hotels

42.8

21%

617.3

18%

27.0

100%

Theme parks

37.9

19%

562.8

17%

54.0

100%

Foodstores

20.2

10%

374.4

11%

16.0

93%

Industrial

13.3

7%

260.7

8%

22.0

100%

Pubs

8.7

4%

128.8

4%

25.0

100%

Arena

7.1

4%

90.6

3%

14.0

70%

Car parks

4.5

2%

70.6

2%

28.0

100%

Garden centres

3.2

2%

53.2

2%

31.0

100%

Life sciences

2.9

1%

53.9

2%

25.0

100%

Drive-through coffee

2.7

1%

39.4

1%

13.0

92%

Education

2.2

1%

35.5

1%

28.0

100%

Other

11.5

6%

152.2

5%

17.0

90%

Total/average

202.2

100%

3,356.3

100%

26.0

98%

Source: LXi REIT.

Through the merger, Merlin Entertainments (19% of passing rent) and Ramsay Healthcare (18% of passing rent), along with Travelodge (an existing LXi tenant but increased to a combined 18%) became LXi’s largest tenants. Each is performing well, with operations that have defensive qualities, but over time we expect LXi to use selective disposals as an opportunity to reduce sector and tenant concentration, repay debt and reduce leverage, and redeploy capital.

Modest uplift in recurring income forecasts

FY23 adjusted cash earnings (‘earnings’) was in line with our last published forecasts (with some composition differences) while NAV, DPS and loan-to-value (LTV) were consistent with the company’s prior announcements. In terms of composition, the main divergence of our earnings forecast from the reported FY23 results was our inclusion of the c £4.1m (£8.2m pa) lease payment resulting from the income strip transaction as a rent reduction, rather than a lease payment within finance expense.

On a similar basis, our FY24 forecast increases by c 3%, driven mostly by licence fee income on the properties under development and lower investment adviser fees, and we have extended the forecast period to FY26. We expect fully covered DPS growth of almost 4% pa beyond the 6.6p that the company targets for the current year.

With property revaluation remaining uncertain, we have assumed no change in valuation in FY24, despite continuing rental growth, equivalent to an additional 10bp increase in yield to 5.5%. In FY25 and FY26 we assume an unchanged yield with rental growth driving valuation gains.

Every 1% increase (or decrease) in portfolio value adds (or reduces) FY24e EPRA NTA per share by c 2p.

Our assumptions are slightly more conservative than the company view, which anticipates the property market repricing of FY23 will begin to slowly reverse in the second half of the calendar year as inflation stabilises and interest rate expectations peak. It expects to benefit from a tendency for properties with robust defensive qualities to rebound the quickest, particularly in tougher economic climates, with capital seeking well let, secure, long-term investments with built-in inflation protection.

Exhibit 3: FY23 reported versus forecast and forecast changes

£m

Reported

New forecast

Previous forecast

FY23 vs forecast

FY24e change

FY23

FY24e

FY25e

FY26e

FY23e

FY24e

Cash rental income

160.4

196.9

205.6

213.0

156.3

192.7

4.1

4.2

Licence fees/amortisation of cash-bank rental top-ups/rent frees

4.0

3.4

1.6

0.0

3.3

1.9

0.7

1.5

Investment Adviser fee

(12.9)

(12.6)

(15.1)

(15.9)

(12.7)

(14.0)

(0.2)

1.4

Administrative costs*

(4.4)

(5.0)

(5.3)

(5.5)

(4.4)

(5.0)

0.0

0.0

Net finance expense**

(45.7)

(64.2)

(64.8)

(64.8)

(40.6)

(60.4)

(5.1)

(3.8)

Tax

(1.0)

0.0

0.0

0.0

(1.7)

0.0

0.7

0.0

Adjusted cash earnings

100.4

118.6

122.1

126.9

100.2

115.3

0.2

3.3

Adjusted cash EPS (p)

6.7

6.9

7.1

7.4

6.7

6.7

0.0

0.2

DPS declared (p)

6.3

6.6

6.9

7.1

6.3

6.6

0.0

0.0

Adjusted cash earnings dividend cover (x)

1.06

1.05

1.04

1.05

1.06

1.03

EPRA NTA per share (p)

121.1

123.6

128.8

135.4

121.0

123.6

0.1

0.1

EPRA NTA total return

-10.7%

7.4%

9.7%

10.5%

-10.8%

7.5%

Net LTV*

35.6%

35.7%

34.6%

33.0%

34.3%

34.7%

Source: LXi REIT accounts and Edison Investment Research. Note: *FY23 excludes £1.4m of abortive costs included in IFRS earnings. **Excludes non-cash amortisation of loan arrangement fees included in IFRS earnings.

Our key forecasting assumptions are:

No acquisitions or disposals, although both are likely given that capital recycling is a core element of LXi’s strategy.

Like-for-like rental growth of 2.6% in FY24 (FY23: 2.3%), 2.3% in FY25 and 2.6% in FY26. This assumes that CPI declines to c 5% by end-FY24, c 3% by end-FY25 and c 2% by end-FY26. For RPI we assume c 6%, c 4% and c 3% respectively.

For FY24, although we expect recent inflation to be more fully reflected in five-year rent reviews, there are fewer reviews due compared to FY23. We assume a lower uplift on annual reviews as inflation moderates. For FY25, we expect lower indexation on annual uplifts, partly offset by higher uplifts on five-year reviews, which will continue to benefit from recent high inflation. The acceleration in like-for-like rental growth in FY26 is driven by an increase in the number of five-year reviews due.

Investment adviser fees are linked to market capitalisation. From H224 we assume the market capitalisation re-rating to 1.0x NAV, consistent with investors anticipating a peaking in the interest rate cycle and in line the historical average. Combined with NAV growth this drives our forecast fee growth.

With the merger costs achieved by mid-FY24, we forecast administrative cost growth broadly in line with inflation.

With property revaluation remaining uncertain we have assumed no change in valuation in FY24, despite continuing rental growth, equivalent to an additional 10bp increase in yield to 5.5%. In FY25 and FY26 we assume an unchanged yield with rental growth driving valuation gains.

Strong management alignment with investors

LXi has the largest board and management team stake of any UK REIT, valued at more than £100m, strongly aligning the interests of the company and its shareholders. Key members of the investment advisory team at LXi REIT Advisors,1 who execute the company’s investment strategy, have consistently increased their investments in the company in recent months.

  1 The investment adviser has extensive expertise in the real estate sector, with a particular focus on accessing secure, long-let and index-linked UK commercial real estate through forward funding and built-asset structures. It is 100% owned by AlTi, formed by the recent combination of Alvarium Investments and Tiedemann Group. The investment adviser’s management team and employees work exclusively on LXi REIT, independently from any other AlTi. Freddie Brooks, CFO of LXi REIT Advisors will step down from his position on 3 September 2023 but will work in a consultancy capacity until the end of the year to whilst a long-term replacement is sought.

Prior to the merger, Secure Income REIT was externally managed by Prestbury Investment Partners, and its management team held a c 12% stake in the company. Senior members of the Prestbury team are now significant investors in LXi with a 5.8% interest. This includes Nick Leslau (chairman and majority shareholder of Prestbury) and Sandy Gumm (chief operating officer of Prestbury), both of whom joined the board of LXi as non-executive directors. Meanwhile, Mike Brown (chief executive officer of Prestbury) became an advisor to LXI REIT Advisors.

FY23 yield widening was mitigated by rent growth

The 9.6% like-for-like decline in portfolio value in FY23 reflected a 90bp widening of the valuation yield (from 5.4% from 4.5%) partly offset by 2.3% like-for-like rental growth and other asset management activity. Chief among the latter was the Travelodge lease re-gear and rent smoothing. The performance appears favourable compared with MSCI Quarterly Index data that indicate a decline of c 7% over the same period.

Exhibit 4: FY23 like-for-like change in valuation and rental growth

Like-for-like valuation change

Like-for-like rental growth

Healthcare

-6.2%

3.1%

Budget hotels

-1.1%

11.2%

Theme parks

-9.1%

3.9%

Foodstores

-19.8%

0.6%

Industrial

-23.2%

1.1%

Pubs

-0.4%

0.7%

Other

-12.8%

2.4%

Portfolio total

-9.6%

2.3%

Source: LXi

Aside from asset management, those sectors where strong operational fundamentals have been reflected in relatively lower yields (eg foodstores, industrials) tended to see the greatest yield shift in response to higher bond yields. Healthcare properties benefited from their highly defensive nature.

Refinancing has extended debt maturity at an attractive interest cost

Post-merger, coming into H223, LXi had c £800m of borrowing, around half its total facilities, with relatively near-term maturities in 2023 and 2024. Refinancing this debt was a key focus and this was successfully achieved by early April 2023, despite the further rise in interest rates and considerable volatility in debt markets. The company has also received a BBB- Investment Grade credit rating with a stable outlook from Standard & Poor’s.

Prior to the year-end, LXi agreed an extension of an existing £60m facility and completed a new £148m 16-year term loan. In April a new £565m facility was completed with a syndicate of banks comprising a number of LXi’s existing lenders. The facility consists of a £200m five-year revolving credit facility, a £115m five-year term loan and a £250m three-year term loan.

End-FY23 debt was £1,250m, fully drawn and, including the new facilities agreed in April and subsequent facility repayments, total debt is now £1,298.6m. All borrowing costs are fixed or hedged to maturity at a weighted average cost of 4.7%, compared with 4.2% in September 2022.

Exhibit 5: Current debt portfolio

Lender

Facility

Principal

Maximum cost

Maturity

LTV*

Scottish Widows

Term loan

£55.0m

2.74%

Dec-33

34%

Scottish Widows

Term loan

£40.0m

2.74%

Dec-33

Scottish Widows

Term loan

£75.0m

2.99%

Dec-33

HSBC

Leisure facility

£60.0m

4.55%

Dec-24

33%

L&G

Healthcare facility 1

£63.1m

4.29%

Sep-25

41%

AIG

Healthcare facility 2

£292.5m

5.30%

Oct-25

44%

Canada Life

Long term loan

£148.0m

5.75%

Mar-39

40%

Syndicate**

Syndicate loan A

£115.0m

4.15%

Jan-28

39%

Syndicate**

Syndicate loan B

£250.0m

4.15%

Jan-26

Syndicate**

Syndicate RCF

£200.0m

5.87%

Jan-28

Total debt portfolio

£1,298.60

4.71%

6 years

Source: LXi. Note: *Based on March 2023 portfolio value. **The syndicate comprises Lloyds, Barclays, Santander and RBS International.

The refinancing activity has extended the weighted average maturity of LXi’s debt to six years from three years previously and it is now well spread across a range of lenders and maturities. While the fixed cost of debt provides nearer-term certainty, the spread of maturities and hedging arrangements provide flexibility to respond to future changes in interest rates. We also expect the credit rating to increase medium-term funding flexibility, including potential access to the corporate bond market.

Exhibit 6: Debt maturity profile

Source: LXi data

LTV reduction

The partial cash alternative offered to SIR shareholders in the merger (25% or £390m) and the market-wide widening of valuation yields (reduction in property values) has increased the LTV to 37% (post refinancing) on the company’s conservative look-through basis at end-FY23.2 This is despite the positive impact on LTV of the Merlin income strip transaction. LXi remains committed to a conservative medium-term LTV target of c 30% and notes that, other things being equal, contractual rental growth would reduce LTV to 35.5% in 12 months and 33.8% in 24 months assuming yields remain flat, allowing the rental growth to be capitalised.

  2 LXi calculates LTV as net debt, adjusted to include trade payables, as a percentage of the portfolio value, adjusted to include outstanding commitments to forward funded developments and property purchase exchanges. Edison’s standard definition compares net debt with the stated portfolio market value, which was 35.6% at end-FY23.

The end-FY23 LTV was comfortably below the company’s medium-term borrowing policy cap of 40%, while there was substantial headroom on loan facilities. It would take a 30% reduction in FY23 portfolio values to breach the most restrictive LTV covenant across LXi's secured facilities while significant unsecured assets and cash remain available. Interest cover covenants are protected by fixed/capped interest rates. We estimate that portfolio value would need to decline by a further 7% on a like-for-like basis, with no management action, before reaching an LTV of 40%.

We estimate that a 1% increase in portfolio values would lower LTV by c 40bps and that a 1% reduction in portfolio value would raise LTV by a similar amount.

Valuation and performance

Since listing in February 2017, LXi has delivered an annualised total accounting return of 56% or an average 7.5% pa. Despite the market challenges of FY23, this is close to the company’s 8% pa medium-term target. Of the total return over the period, dividends paid have represented 32% or almost 60% of the total. Our forecasts for FY24–26 (Exhibit 3 above) imply positive accounting total returns in each year, averaging 8.7% pa, of which 58% relates to our dividend assumptions and 42% to our capital assumptions.

Exhibit 7: NAV total return history

FY18

FY19

FY20

FY21

FY22

FY23

IPO to end-FY23

Opening NAV (p)

98.0

107.7

114.6

124.3

125.7

142.6

98.0

Closing NAV (p)

107.7

114.6

124.3

125.7

142.6

121.1

121.1

DPS paid (p)

2.00

6.13

5.69

5.53

5.96

6.23

31.53

Income return

2.0%

5.7%

5.0%

4.4%

4.7%

4.4%

32.2%

Capital return

9.9%

6.4%

8.5%

1.1%

13.4%

-15.1%

23.5%

Total return

11.9%

12.1%

13.4%

5.5%

18.2%

-10.7%

55.7%

Average total return pa

7.5%

Source: LXi REIT data, Edison Investment Research

LXi shares offer a 7.3% FY24e prospective yield and trade at a 23% discount to the FY23 EPRA NTA per share of 121.1p, well below the average 1.0x NAV at which the shares have traded since listing. The valuation is now below its level at the height of pandemic uncertainty, which quickly unwound as investor confidence improved.

Exhibit 8: Dividend yield history (%)

Exhibit 9: P/NAV history (x)

Source: LXi annual DPS data on a trailing basis, Refinitiv prices

Source: LXi NAV data on a trailing basis, Refinitiv prices

Exhibit 8: Dividend yield history (%)

Source: LXi annual DPS data on a trailing basis, Refinitiv prices

Exhibit 9: P/NAV history (x)

Source: LXi NAV data on a trailing basis, Refinitiv prices

In Exhibit 10 we show the key valuation and performance metrics for LXi and a group of other long-income REITs, mostly comprising subsector specialist investors. LXi’s long weighted average unexpired lease term (WAULT) of 27 years is well above the average of the group. For comparative purposes, the DPS and NTA/NAV data are shown on a trailing basis,3 taking the last 12-month DPS declared and last reported NTA/NAV.

  3 With the exception of Target Healthcare where the table reflects its recently re-based dividend policy.

LXi’s trailing yield is slightly below the peer group average, but does not reflect the 4.8% increase targeted for FY24, and its P/NAV is in line. LXi’s share price performance is lower than the average on a one-year basis but well above the average over three years. The range of share price performances across the group is wide, reflecting the varying fortunes of the subsectors on which most peers are focused. It is this variability that underlines the potential attraction of a diversified and actively managed vehicle such as LXi to investors who seek, but are otherwise unable to achieve, an optimal diversification of risks.

Exhibit 10: Peer performance and valuation

Recent WAULT
(years)

Price
(p)

Market cap (£m)

P/NAV*
(x)

Yield**
(%)

Share price performance

1 month

3 months

12 months

3 years

Assura

11

46

1,366

0.86

6.7

-3%

-9%

-31%

-40%

Alternative Income REIT

17

61

49

0.73

9.4

-13%

-10%

-23%

19%

Impact Healthcare

20

89

367

0.79

7.4

-6%

-9%

-24%

-14%

LondonMetric

12

170

1,671

0.85

5.6

-4%

-8%

-29%

-24%

Primary Health Properties

11

93

1,238

0.82

7.1

-8%

-12%

-33%

-38%

Supermarket Income

14

73

913

0.80

8.2

-5%

-15%

-41%

-34%

Target Healthcare

27

75

464

0.72

8.0

3%

-3%

-34%

-29%

Triple Point Social Housing

25

56

219

0.50

9.8

7%

7%

-40%

-47%

Tritax Big Box

13

130

2,420

0.72

5.5

-6%

-12%

-31%

-11%

Average

17

0.74

7.4

-3%

-8%

-33%

-28%

Lxi REIT

27

90

1,540

0.75

7.0

-6%

-13%

-38%

-17%

UK property sector index

1,199

-4%

-9%

-27%

-18%

UK equity market index

4,038

-3%

-6%

2%

16%

Source: Company data, Refinitiv prices at 18 July 2023. Note: *Based on last reported EPRA NAV/NTA. **Based on trailing 12-month DPS declared.

FY23 financial results in detail

The FY23 results clearly show the impact of the merger with Secure Income REIT, which completed on 6 July 2022. While less than nine months of the merger was reflected in the income statement, significant economies of scale were achieved, with the EPRA cost ratio reduced to 9.5% (among the lowest, if not the lowest, in the UK REIT sector) and adjusted EPS increased 19%. The H223 summary in Exhibit 11 below provides a better indication of the run-rate of underlying earnings.

The end-FY23 balance sheet fully reflected the merger, with the portfolio value more than doubling to £3.4bn and the LTV increased to 37% (on the company’s look-through basis) due to the partial cash funding of the merger and property valuation declines.

In Exhibit 11, our presentation of the income statement is structured to show the breakdown of LXi’s adjusted cash earnings, the basis for dividend distributions, following through to statutory IFRS earnings.

Exhibit 11: Summary of FY23 financial performance

£m unless stated otherwise

FY23

FY22

FY23/FY22

H123

H223

Cash rental income

160.4

48.6

230%

61.8

98.6

License fee receivable

3.1

3.6

1.2

1.9

Amortisation of cash-backed rental top ups and rent frees

0.9

3.2

0.3

0.6

Total adjusted income

164.4

55.4

197%

63.3

101.1

Investment Adviser fee

(12.9)

(7.1)

82%

(6.2)

(6.7)

Administrative & other expenses

(4.4)

(2.2)

100%

(1.9)

(2.5)

Adjusted operating profit

147.1

46.1

219%

55.2

91.9

Net interest expense

(45.7)

(6.8)

(15.2)

(30.5)

Tax

(1.0)

0.7

(1.7)

0.7

Adjusted cash earnings

100.4

40.0

151%

38.3

62.1

IFRS rent adjustments

37.8

9.9

13.7

24.1

Received on interest rate derivative held at fair value through p&l

(2.2)

(2.2)

Abortive fees

(1.5)

0.0

(1.4)

(0.1)

Exclude license fee receivable

(3.1)

(3.6)

(1.2)

(1.9)

Exclude amortisation of cash-backed rental top ups and rent frees

(0.9)

(3.2)

(0.3)

(0.6)

Include amortisation of loan fees

(6.1)

0.0

(2.3)

(3.8)

EPRA earnings

124.4

43.1

189%

46.8

77.6

EPRA cost ratio

9.5%

15.9%

12.6%

7.6%

Realised/unrealised gain/(loss) on investment property

(409.5)

117.7

(80.4)

(329.1)

Change in fair value of financial instruments

22.2

1.2

25.0

(2.8)

Gain on disposal of interest derivative

(4.6)

0.0

(4.6)

Loss on extinguishment of debt

(20.6)

0.0

(20.6)

0.0

IFRS earnings

(288.1)

162.0

(29.2)

(258.9)

Shares outstanding (m)

1,714.5

911.6

88%

1,714.5

1,714.5

Average shares outstanding (m)

1,501.1

710.2

111%

1,288.9

1,714.5

Adjusted cash EPS (p)

6.7

5.6

18%

3.0

3.7

EPRA EPS (p)

8.3

6.1

36%

3.6

4.7

IFRS EPS (p)

(19.2)

22.8

(2.3)

(16.9)

DPS (p)

6.30

6.00

5%

3.15

3.15

EPRA dividend cover (x)

1.32

1.01

1.15

1.44

Adjusted cash dividend cover (x)

1.06

0.94

0.94

1.15

IFRS net assets

2,108

1,301

2,448.2

2,108.1

EPRA NTA

2,076

1,300

2,422.3

2,075.7

EPRA NTA per share (p)

121.1

142.6

-15%

141.3

121.1

EPRA NTA total return

-10.7%

18.2%

0.1%

-11.0%

Portfolio value

3,356

1,544

117%

3,656.6

3,356.3

Gross borrowing

(1,250)

(246)

(1,481.5)

(1,250.0)

Cash

74

73

114.3

74.4

Edison LTV (net debt/balance sheet portfolio value)

36%

12%

38%

36%

LXi look through LTV (adjusted for capital commitments and available cash only)

37%

22%

33%*

37%

Source: LXi data, Edison Investment Research

On an annualised basis, end-FY23 contracted rent roll was £202.2m up from £77.0m at end-FY22, pre-merger, and £207.0m. Like-for-like growth in contracted rental income was 2.3% with the weighting of reviews skewed towards H123.

Cash rental income earned during the year amounted to £160m, yet to reflect a full year impact of the merger as well as continued rental growth during the year.

The increase in investment adviser fee was limited by the lower fee structure in place post-merger, representing savings of £7.5m pa across the combined businesses, and, with fees linked to market capitalisation, the lower price to NAV on which the shares have traded throughout the year

Administrative and other expenses, excluding non-recurring aborted project fees, increased with the scale of the business but benefited from merger cost savings, which are targeted at £1.1m pa.

Adjusted cash earnings increased to £100.4m, and allowing for the increase in average shares outstanding, to 1,501m from 710m, Adjusted cash EPS increased 18% to 6.7p.

Reflecting a significant increase in non-cash IFRS rent smoothing adjustments following the SIR merger, EPRA earnings increased at an even stronger pace than cash earnings, to £124m or 8.3p per share (+36%).

DPS of 6.3p (+5%) was 1.06x covered by adjusted cash earnings and 1.32x by EPRA earnings.

The increase in the independent portfolio value to £3.4bn included a like-for-like reduction of 9.6%, most of which occurred in the second half of the year, reflecting a 90bps widening of the valuation yield during the year to 5.4%.

Including the impact of gearing, EPRA NTA per share was 15% lower at 121.1p

Exhibit 12: Financial summary

Year to 31 March (£m)

2021

2022

2023

2024e

2025e

2026e

INCOME STATEMENT

Cash rental income

34.4

48.6

160.4

196.9

205.6

213.0

IFRS rental adjustments

8.4

9.9

37.8

48.2

44.6

40.3

Total net rental income

42.8

58.5

198.2

245.1

250.2

253.3

Investment Adviser fee

(4.4)

(7.1)

(12.9)

(12.6)

(15.1)

(15.9)

Administrative & other expenses

(1.5)

(2.2)

(5.9)

(5.0)

(5.3)

(5.5)

Operating profit before property & other valuation movements

36.9

49.2

179.4

227.5

229.9

232.0

Realised & unrealised change in value of investment property

6.4

117.7

(409.5)

0.0

44.5

69.3

Change in fair value of financial instruments

0.0

1.2

22.2

0.0

0.0

0.0

Net interest expense

(5.3)

(6.8)

(54.0)

(69.2)

(69.8)

(69.8)

Gain/(loss) on refinancing

1.9

0.0

(25.2)

(4.0)

0.0

0.0

Profit before tax

39.9

161.3

(287.1)

154.4

204.6

231.5

Tax

0.0

0.7

(1.0)

0.0

0.0

0.0

IFRS net income

39.9

162.0

(288.1)

154.4

204.6

231.5

Adjust for:

Realised & unrealised change in value of investment property

(6.4)

(117.7)

409.5

0.0

(44.5)

(69.3)

Change in fair value of financial instruments

0.0

(1.2)

(22.2)

0.0

0.0

0.0

Other EPRA adjustments

0.0

0.0

25.2

4.0

0.0

0.0

EPRA earnings

33.5

43.1

124.4

158.4

160.1

162.2

License fees and amortisation of cash-bank rental top-ups/rent frees.

5.7

6.8

4.0

3.4

1.6

0.0

IFRS rent smoothing adjustments

(8.4)

(9.9)

(37.8)

(48.2)

(44.6)

(40.3)

Amortisation of loan arrangement fees

0.0

0.0

6.1

5.0

5.0

5.0

Other adjustments

(1.9)

0.0

3.7

0.0

0.0

0.0

Adjusted cash earnings

28.9

40.0

100.4

118.6

122.1

126.9

Period-end number of shares (m)

621.8

911.6

1,714.5

1,714.5

1,714.5

1,714.5

Weighted average number of shares (m)

526.1

710.2

1,501.1

1,714.5

1,714.5

1,714.5

IFRS EPS (p)

7.6

22.8

(19.2)

9.0

11.9

13.5

EPRA EPS (p)

6.4

6.1

8.3

9.2

9.3

9.5

Adjusted cash EPS (p)

5.5

5.6

6.7

6.9

7.1

7.4

DPS declared (p)

5.6

6.0

6.3

6.6

6.9

7.1

Dividend cover (EPRA earnings basis) (x)

1.15

1.01

1.32

1.40

1.36

1.34

Dividend cover (cash earnings basis) (x)

0.99

0.94

1.06

1.05

1.04

1.05

BALANCE SHEET

Investment property

887.5

1,480.1

3,569.6

3,672.5

3,761.7

3,871.3

Other non-current assets

0.4

0.0

29.5

32.6

32.6

32.6

Total non-current assets

887.9

1,480.1

3,599.1

3,705.1

3,794.3

3,903.9

Cash (unrestricted)

87.1

72.5

74.4

14.4

20.2

28.0

Restricted cash

0.0

0.0

0.0

0.0

0.0

0.0

Other current assets

15.1

40.3

54.8

22.5

23.3

24.0

Total current assets

102.2

112.8

129.2

36.9

43.5

52.1

Trade & other payables

(18.3)

(38.6)

(82.6)

(79.5)

(83.0)

(85.8)

Other non-current liabilities

0.0

0.0

(508.7)

0.0

0.0

0.0

Total current liabilities

(18.3)

(38.6)

(591.3)

(79.5)

(83.0)

(85.8)

Bank borrowings

(186.6)

(240.0)

(729.8)

(1,211.5)

(1,214.5)

(1,217.5)

Other non-current liabilities

(3.8)

(13.6)

(299.1)

(299.1)

(299.1)

(299.1)

Total non-current liabilities

(190.4)

(253.6)

(1,028.9)

(1,510.6)

(1,513.6)

(1,516.6)

Net assets

781.4

1,300.7

2,108.1

2,151.9

2,241.2

2,353.6

EPRA net tangible assets (NTA)

781.4

1,299.5

2,075.7

2,119.5

2,208.8

2,321.2

EPRA NTA per share (p)

125.7

142.6

121.1

123.6

128.8

135.4

EPRA NTA total return (inc DPS paid)

5.6%

18.2%

-10.7%

7.4%

9.7%

10.5%

CASH FLOW

Net cash flow from operating activity

28.9

51.4

169.7

173.2

187.8

205.2

Acquisition of investment property

(160.5)

(425.4)

(80.0)

(54.7)

0.0

0.0

Proceeds from sale of investment property

96.0

8.3

29.5

0.0

0.0

0.0

Other investment activity

0.0

(0.1)

(391.9)

32.3

0.0

0.0

Net cash flow from investing activity

(64.5)

(417.2)

(442.4)

(22.4)

0.0

0.0

Net proceeds from equity issuance

122.3

346.6

0.0

0.0

0.0

0.0

Dividends paid

(28.8)

(41.1)

(89.0)

(110.6)

(115.3)

(117.4)

Interest paid

(5.9)

(6.6)

(40.4)

(56.0)

(56.6)

(56.6)

Net debt drawn/(repaid)

22.3

53.7

176.4

(30.0)

0.0

0.0

Other cash flow from financing activity

(29.5)

(52.8)

57.9

(187.4)

(198.0)

(215.4)

Net cash flow from financing activity

109.3

351.2

274.6

(210.7)

(182.1)

(184.2)

Change in cash

73.7

(14.6)

1.9

(60.0)

5.8

21.0

Opening cash

13.4

87.1

72.5

74.4

14.4

20.2

Closing cash

87.1

72.5

74.4

14.4

20.2

41.2

Balance sheet debt

(186.6)

(240.0)

(1,238.5)

(1,211.5)

(1,214.5)

(1,217.5)

Unamortised loan costs

(5.7)

(6.0)

(11.5)

(8.5)

(5.5)

(4.0)

Net debt

(105.2)

(173.5)

(1,175.6)

(1,205.6)

(1,199.8)

(1,180.3)

Edison LTV (net debt/balance sheet investment property)

11.9%

11.7%

35.6%

35.7%

34.6%

33.0%

Source: LXi historical data, Edison Investment Research forecasts

General disclaimer and copyright

This report has been commissioned by LXi REIT and prepared and issued by Edison, in consideration of a fee payable by LXi REIT. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

General disclaimer and copyright

This report has been commissioned by LXi REIT and prepared and issued by Edison, in consideration of a fee payable by LXi REIT. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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