LXi REIT — Stronger, leaner and fitter

LXi REIT (LSE: LXI)

Last close As at 15/06/2024

GBP1.01

0.00 (0.00%)

Market capitalisation

1,729m

More on this equity

Research: Real Estate

LXi REIT — Stronger, leaner and fitter

LXi REIT’s (LXi’s) well-executed merger with Secure Income REIT (SIR) brought together two complementary businesses, adding scale at low cost and retaining LXi’s successful diversified, inflation-protected, long-income strategy. We expect this approach to deliver visible income and DPS growth, including merger cost savings, and mitigate market-wide pressure on capital values. Meanwhile, good progress is being made with the near-term priorities of debt refinancing, capital recycling, and lease regears.

Martyn King

Written by

Martyn King

Director, Financials

Real Estate

LXi REIT

Stronger, leaner and fitter

Post-merger re-initiation

Real estate

16 March 2023

Price

101p

Market cap

£1,738m

Net debt (£m) at 30 September 2022

1,367

Net LTV at 30 September 2022*

33%

*LXi pro forma, adjusted for impact of ‘income strip’, unconditionally agreed before 30 September and completed shortly thereafter (see page 6).

Shares in issue

1,714.5m

Free float

86.4%

Code

LXI

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(13.2)

(13.5)

(29.2)

Rel (local)

(5.6)

(12.5)

(29.5)

52-week high/low

154p

101p

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

FY23 year-end

31 March 2023

Analyst

Martyn King

+44 (0)20 3077 5700

LXi REIT is a research client of Edison Investment Research Limited

LXi REIT’s (LXi’s) well-executed merger with Secure Income REIT (SIR) brought together two complementary businesses, adding scale at low cost and retaining LXi’s successful diversified, inflation-protected, long-income strategy. We expect this approach to deliver visible income and DPS growth, including merger cost savings, and mitigate market-wide pressure on capital values. Meanwhile, good progress is being made with the near-term priorities of debt refinancing, capital recycling, and lease regears.

Year end

Rental income (£m)

Adjusted ‘cash’ earnings* (£m)

Adjusted ‘cash’
EPS** (p)

EPRA NTA
per share (p)

DPS
(p)

P/NTA
(x)

Yield
(%)

03/21

42.8

28.9

5.5

125.7

5.55

0.81

5.5

03/22

58.5

40.0

5.6

142.6

6.00

0.71

5.9

03/23e

193.5

100.2

6.7

121.0

6.30

0.84

6.2

03/24e

237.3

115.3

6.7

123.5

6.60

0.82

6.5

Note: *Adjusted for gains/losses on investment properties, other fair value movements and licence fee income on forward funding extended. **Excludes non-cash IFRS adjustments that are included in adjusted earnings.

Diversified, inflation protected long income…

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. We expect no post-merger change in strategy. This includes forward fundings, sale and leasebacks and capital recycling, combined with a focus on structurally supported subsectors and underlying property fundamentals, including low starting rents. These are all attributes that should be supportive in current market conditions. It is a multi-sector approach that clearly differentiates LXi from many specialist peers, which spreads risks and broadens the universe of investment opportunities available.

…supports DPS growth and protects capital values

Strong H123 revenues and earnings growth included a less than three-month contribution from SIR. We expect further strong earnings growth and fully covered DPS growth, driven by a full contribution from SIR, merger cost savings, inflation-driven rental growth and a low cost. We do not expect LXi to be immune from market-wide asset yield expansion but, as in H123, we expect visible rental growth to provide a partial offset, along with lease regears. An innovative post-merger ‘income strip’ was accretive to earnings and reduced LTV from 37% to 33%, but we expect H223 yield widening to reverse this and delay progress towards the medium-term target of 30%, likely to include capital recycling. Meanwhile, refinancing of debt maturing in the next two years is well advanced, including a new £150m 16-year fixed rate term loan and wider refinancing at an advanced stage.

Good premium to risk-free yield and DPS growing

LXi has outperformed peers over the past one and three years, reflecting strong annualised accounting returns of 10.1% pa since listing in 2017 to H123, above the targeted 8%. Having fallen alongside the broader sector, the shares now offer an FY23e yield of 6.2%, well above 10-year gilts (c 3.3%), and 0.84x our forecast FY23 NAV, compared with an average c 1x since listing.

Investment summary

Diversified, inflation-protected long income

LXi listed in February 2017 and is externally managed by LXi Advisers (the investment adviser). From listing it grew strongly, with its portfolio value reaching c £1.6bn ahead of its merger with Secure Income REIT (SIR), which was announced on 11 May 2022 and completed on 6 July 2022. The merger brought together two complementary and well-performing portfolios and strategies, both focused on very long leases, subject mainly to inflation-linked rental uplifts, to good-quality tenants. The enlarged LXi, with a 30 September 2022 (H123) portfolio valuation of c £3.7bn, is the UK’s leading sector-diversified, long-income real estate investment trust (REIT). The company is a constituent of the UK 250 Index, MSCI Index, STOXX Europe 600 Index and leading property indices. The end-H123 portfolio comprised 348 fully occupied properties, producing annual contracted passing rent of £200.7m, with a long weighted average unexpired lease term (WAULT) of c 26 years. An accretive regear of Travelodge Hotels in December 2022 increased the WAULT to more than 27 years.

Exhibit 1: Strong growth since listing

Source: LXi data, Edison Investment Research. Note: *H123 includes the addition of SIR.

LXi’s assets are well diversified across a broad range of resilient subsectors, selected with a focus on high barriers to entry, strong underlying property fundamentals and low starting rents. They are let on very long-term, triple net full repairing and insuring leases to tenant counterparties that have demonstrated strong performance throughout previous economic cycles.

We expect no material change in LXi’s strategy post-merger. Its diversified multi-sector approach continues to differentiate it from many specialist long-income REITs that focus on a particular sector of the market. While specialisation can bring many advantages, it can also create vulnerability to significant changes in market conditions or strong competition for assets. Low-risk forward funding of pre-let development assets has enhanced returns by enabling LXi to source high-quality assets at a lower cost than would be possible purely from targeting completed assets, while regular recycling of capital provides a means of rebalancing exposures to manage risk and optimise capital deployment.

Long leases with good-quality tenants provide security of contractual income, while the upward-only, substantially indexed lease terms add predictability and visibility to income growth. As a result, we expect that property yields and capital values will show less volatility than may be the case for short-lease assets as the UK real estate sector continues to adjust to higher bond yields and a weaker economic growth outlook. We also expect this sustainable income profile to continue to have a positive impact on the cost and duration of available debt funding, allowing the company to lock in positive and increasing (with rent indexation) spreads between those costs and asset yields.

Benefits of the merger

We highlight the following key benefits to shareholders that LXi expects from the merger:

Increased scale from which to enhance future growth and to continue to deliver secure and attractive long-dated and growing income returns while mitigating the impacts of more cyclical capital value volatility.

Cost savings of £8.6m pa expected by the company, with immediate accretion to cash earnings, providing continuing support for dividend growth, and enabling it to maintain one of the lowest cost ratios in the sector.1 The expected savings comprise £7.5m of investment advisory fees as a result of a lower average fee scale for the enlarged portfolio and operational cost savings of £1.1m. Most of the savings will affect H223 earnings, with a relatively small impact included in the H123 report.

  The H123 EPRA cost ratio was 12.6% before the realisation of most of the merger synergy benefits.

Enhanced access to cheaper, better, longer-term and more flexible capital, more immediately from a debt perspective and over the medium term on an equity basis.

Low merger transaction costs of c £35m, representing less than 1% of the combined portfolio value or a 2.7p per share reduction in end-H123 net asset value per share.

Strong returns since listing in 2017

Since listing in February 2017, LXi has delivered an annualised total accounting return of 10.1% pa compounded, well ahead of its 8% pa medium-term target. Of the total return over the period, dividends paid have represented c 40% and capital growth c 60%. We forecast further growth in income returns, both in absolute terms and as a share of the total, with negative capital returns in the current year reflecting significant market-wide property yield expansion.

Exhibit 2: NAV total return since listing in 2017

FY18

FY19

FY20

FY21

FY22

H123

IPO to end-H123

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

139.7

139.7

DPS paid (p)

2.00

6.13

5.69

5.53

5.96

3.08

28.38

Income return

2.0%

5.7%

5.0%

4.4%

4.7%

2.2%

29.0%

Capital return

9.9%

6.4%

8.5%

1.1%

13.4%

-2.0%

42.5%

Total return

11.9%

12.1%

13.4%

5.5%

18.2%

0.1%

71.5%

Average return pa

10.1%

Source: LXi REIT data, Edison Investment Research. Note: H123 after deducting the Q223 DPS of 1.575p, which went ex-dividend on 29 September and was paid on 18 November 2022.

Continuity of management and shareholder alignment

The merger with SIR was structured in a way that provides continuity of management and enhances the resources available to the investment advisor at a lower marginal cost. Additionally, following the merger, the alignment between LXi and its shareholders has strengthened further and it now has the largest board and management team stake of any UK REIT. The value of this stake at 30 September 2022 was c £140m (at a share price of c 124p).

LXi REIT Advisors (the investment advisor)2 continues to manage the combined group but its capabilities have been strengthened by the addition of key members of SIR’s management team, Prestbury Investment Partners, following its acquisition by the investment advisor.3 As it was undertaken by the investment advisor and not LXi, the acquisition had no direct financial impact on the company and avoided the payment of termination fees and any material negative effect on NAV. The key individuals responsible for executing the company’s investment strategy are John White, Simon Lee and Freddie Brooks, for whom biographies can be found on page 17.

  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 Alvarium Investments and has a separate management team and separate employees from any other Alvarium business, which works exclusively on LXi REIT. Alvarium Investments has recently combined with Tiedemann Group via a Nasdaq-listed special purpose acquisition vehicle, Cartesian Growth Corp. The combination creates a leading independent, global wealth and asset manager, providing entrepreneurs, multi-generational families, institutions and emerging next-generation leaders with fiduciary capabilities as well as alternative investment strategies and advisory services. At completion of the transaction, combined assets under management and assets under advisement were more than $50bn.

  Prestbury Investment Partners was acquired by Amalfi, an entity funded by shareholders of LXi REIT Advisors, at no cost to LXi REIT. With 3.5 years of Prestbury’s advisory contract with SIR remaining, the externally assessed consideration was £40m, representing 2.6x current annualised fees.

Providing additional continuity of management, the highly experienced and successful senior Prestbury team has a continuing role in the management of the company. Nick Leslau (chairman and majority shareholder of Prestbury) and Sandy Gumm (chief operating officer of Prestbury) have joined the board of LXi as non-executive directors, and Mike Brown (chief executive officer of Prestbury) acts as an advisor to LXI REIT Advisors.

The Prestbury management team has been a significant investor in SIR4 and, having ‘top-sliced’ its position through the cash alternative, it retains a significant 5.8% interest (including Nick Leslau and Sandy Gumm) in the combined group. Along with non-compete obligations for at least two years, this provides a strong alignment of interest between the company and shareholders.

  Ahead of the merger, the Prestbury management team held 12.4% of the SIR shares outstanding with a value of more than £190m.

Since end H123, share purchases by members of the investment management team amounting to c 632,000 have been reported.

The board comprises six members5 in total and is chaired by Cyrus Ardalan, a highly experienced investment banker with well-established corporate governance expertise. Detailed biographies of the board can be found on LXi’s website.

  Patricia Diamond and Jan Etherden have retired from the LXi board subsequent to the merger.

Reduced marginal advisor fees, continuing to be linked to market capitalisation

At the time of the merger, advisory fee savings were estimated by LXi at £7.5m, representing lower LXi average and marginal fee rates compared with SIR, applied to a larger portfolio. Fees continue to be calculated by reference to average market capitalisation (rather than portfolio value or net asset value, as is more common), which fully aligns its interests with those of shareholders. The fee rates applied to the enlarged group are competitive in a sector context (typically around 1% pa) and are tiered, with a new marginal rate of 0.55% on average market capitalisation above £2.0bn. There is no performance fee. LXi reported a 12.6% EPRA cost ratio for H123, one of the lowest in the UK REIT sector, and we expect this to reduce further in H223 as the merger takes full effect.

Exhibit 3: LXI REIT Investment advisor fees as percentage of average market capitalisation

Up to £500m

0.75%

£500m–£2,000m

0.65%

>£2,000m market

0.55%

Source: LXi REIT

Building on core strengths

Prior to the merger, LXi built its portfolio through sale and leaseback transactions and smaller lot size, forward-funded developments, enhanced by active capital recycling. SIR was focused on larger-scale sale and leaseback transactions but had also shown a willingness to dispose of assets where appropriate.

LXi expects that the increased scale of the combined group will enable it to pursue larger sale and leaseback transactions in future, leveraging the expertise of the Prestbury management. With larger scale, it should be better placed to compete with the larger US REITs that are active in this space and access opportunities with corporates and financial sponsors. In September 2022, LXi came close to completing a significant sale and leaseback transaction with Sainsbury's, comprising a portfolio of 18 prime grocery store assets, combining defensive assets with indexed rents and a strong tenant. Contracts were exchanged at an agreed purchase price of £500m, reflecting a net initial acquisition yield of 5.0%, above the 4.7% portfolio average yield at the time as well as the end-H123 yield of 4.9%, with the prospect of five-yearly Consumer Price Index (CPI) rent uplifts. LXi intended to part-fund the acquisition with new equity alongside a new debt facility, the balance of which we expect would have supported LXi’s plans to move towards its 30% loan to value (LTV) target. Unfortunately, the transaction was unable to complete because of the significant market volatility that followed the government’s fiscal statement later in September.

The 82 forward-funded developments undertaken by LXi since IPO have increased its access to attractive assets with enhanced returns. While it does not engage directly in development activity, the forward funding (and acquisition at completion) of development assets on a pre-let, fixed-price basis, has been a key element of its growth and has enabled the company to source high-quality assets at lower cost than would be possible purely from targeting completed assets. Acquisition costs for forward funding are lower and benefit from brand-new leases, generally over 20 years in duration. They have also allowed LXi to target more off-market opportunities, as well as developing brand-new assets to tenant specification, in some cases increasing the strategic importance of the asset to the tenant and, in turn, improving the quality of income. The outstanding capital commitment to forward-funded assets currently under construction was £42m at end-H123, with all the assets expected to complete over the following 12 months. The EPRA yield data include expected passing rents on these assets at completion of £3.5m (included within total contracted rents). Forward-funded assets generate immediate income, with ‘licence fees’ paid by the development contractor, on funding advanced, during the construction phase. Where appropriate, developers also compensate LXi for rent-free periods or periods to the next rent review.

The combined group will continue actively to recycle capital as a way of rebalancing portfolio exposures and optimising capital deployment towards the most promising areas. In the almost six years since LXi listed, it has sold c £200m of assets, mostly initiated by unsolicited approaches from interested buyers. Its willingness to sell assets, and its ability to do so ahead of book value, has provided support for the robustness of its external valuations and is further evidence of its ability to ‘buy well’ and enhance value. The company says these disposals crystalised a geared internal rate of return of 24% pa. The 2019 sale of eight hospitals for £347m to a specialist US healthcare REIT was SIR’s most significant disposal during the same period, crystalising an attractive gain of 19% above the December 2018 valuation.

Immediate focus on refinancing, regearing and capital recycling

In the current challenging market conditions, LXi has indicated a very near-term focus on refinancing shorter-term debt, accretive lease regears (lease extension) and capital recycling, each of which is well-advanced or provides identified opportunities.

Discussed in detail below, LXi plans to refinance c £800m of borrowings that will mature over the next couple of years. The current level of interest rates indicates an increase in borrowing costs, but we do not expect this to be material.

Since reporting H123 results, LXi has already exchanged contracts with Travelodge on a material and accretive lease regear on all 122 Travelodge hotels that formed part of the SIR portfolio. Of the 12 Travelodge hotels which formed part of the pre-merger LXI portfolio, those that were not forward fundings (with recently agreed contractual rents) had already been regeared. In return for introducing caps and collars (4% pa and 1% pa, respectively) into the lease terms and converting the review basis from Retail Price Index (RPI, due to be phased out by 2030) to CPI +0.5% pa, the unexpired lease term will be extended by a weighted average of nine years to 28.5 years. Following discussions with the external valuer, LXi expects the lease extensions to have a material positive impact on the value of these assets and further enhance their investment attraction. The change in rent review profile will help to ensure that the rents remain affordable over time and avoid becoming potentially over-rented6 versus market rents, while providing a floor to uplifts should the economy later move to a low inflation environment.

  If rents rise above market levels, as leases move towards maturity, there would typically be a negative drag on valuations.

As noted above, asset sales, providing opportunities for capital recycling, have mostly been initiated by unsolicited approaches from interested buyers. LXi says that, despite market conditions, it continues to receive unsolicited interest in high-quality assets within its portfolio and that it expects to continue to sell assets selectively where capital could be better allocated to enhance shareholder returns. We expect a blend of reinvestment in assets with a stronger return profile as well as debt reduction.

Innovative Merlin income strip

In September, LXi agreed an innovative ‘income strip’, completing in early October. The effect was to materially reduce debt, and the pro forma LTV ratio, on LXi’s conservative ‘look-through’ basis of calculation, from 37% to 33%7, while generating significant and immediate earnings accretion. Put simply, future rental income in respect of a portion of the company’s leisure assets was sold to an institutional investor at an effective 2.96% net initial yield, allowing the repayment of more expensive bank debt, priced at a fixed 4.95% pa, from the proceeds.

LXi calculates LTV as gross debt facilities less cash as a percentage of the portfolio value including investment commitments. Edison calculates LTV as net drawn debt as a percentage of the property value excluding commitments.

The income sold, for £257m, represents 30% of the rental income received from the Thorpe Park and Alton Towers theme parks operated by the LXi tenant, Merlin. The transaction was structured as a sale by LXi of the freehold of the respective assets and then taking a 999-year leaseback, with the freehold reverting back to it after 65 years for a nominal £1. The sale proceeds were used to fully repay the £232m that had been secured against Thorpe Park and Alton Towers, as well as Warwick Castle (also operated by Merlin). Break costs of £20.6m are fully provided for in the H123 results and the subsequent receipt of £23.1m relating to the closing out of the related interest rate swap has been used to pay down the revolving credit facility.

Lease payments by LXi to the institutional buyer are an initial £8.2m, increasing in line with the annual CPI indexed rent reviews (collared at 1% and capped at 4%) on the properties. Immediate income accretion reflects the positive spread between the lease costs and interest savings on the debt repaid. LXi retains 70% of the rental income received from Merlin for the properties, along with the freehold and all reversionary value after 65 years.

Refinancing of shorter-maturity debt

The partial cash alternative offered to SIR shareholders in the merger (25% or £390m) has initially increased the LTV but LXi remains committed to a conservative medium-term LTV target of 30%. In the near-term, we expect the positive impact on LTV of the of the Merlin income strip transaction to be reversed due to the current weakness in property values across all sectors of the UK market. On the LXi basis of calculation, defined in footnote 7, we forecast an end-FY23 LTV of 38.1%, although the Edison basis is significantly lower at 31.4%. The balance sheet nonetheless benefits from substantial headroom against covenants and significant unencumbered assets (£492m post completion of the income strip, including assets under construction at H123).

H123 borrowing was all fixed/hedged at an average cost of c 4.2%,8 removing any near-term exposure to further interest rate fluctuations. However, to protect its longer-term progressive dividend policy, LXi is in the process of refinancing its shorter-term borrowings, those expiring predominantly through 2023–24.

  This includes adjustment for the £232m repayment of borrowing against the Merlin assets (the ‘Merlin facility’) resulting from the ‘income strip’ as described above.

It is currently in advanced discussions on a range of alternatives, facilitated by the relatively low LTVs across each of the debt facilities, and expects to have completed the process by the end of FY23. LXi says that as well as targeting gearing reduction the refinancing will be consistent with its existing low-risk debt strategy, which over the medium-term seeks to maintain strong headroom to borrowing convents, and discrete security pools with no cross-default provisions. A core of long-term, fixed-rate debt locks in income accretion as indexed/fixed rents increase and the spread over funding costs widens. Revolving credit facilities (RCFs) borrowing facilities provide flexibility for asset recycling timing differences and for forward-funded development drawdowns during the construction phase.

At end-H123 (adjusted for the income strip repayment), the debt maturing in 2023 and 2024, as well as a further small facility in 2025, amounted to just under £800m or 60% of all debt outstanding at the time. The weighted average cost of this shorter maturity debt was 4.0%. Since then, LXi has agreed an extension of an existing £60m facility and has completed a new £150m 16-year term loan.

The £60m HSBC facility has been extended by one year, to 2024, with a further one-month extension option, providing it with flexibility with respect to nearer-term asset management and debt capital initiatives. With a revised interest margin of 2.05%, an existing interest rate cap at 1.84% fixes the cost at 3.89% until July 2023, by which time the company expects to buy an additional cap to hedge the cost until expiry. This will be funded by using a small part of the £24m cash realised from the sale of an interest rate cap used to hedge the Merlin facility prior to early redemption.

The £150m facility, provided by a new lender, a leading European insurance company, carries a 1.75% margin over the 2038 UK gilt yield (currently c 3.6%), to be fixed when the facility is drawn, conditional among other things on the redemption of existing borrowings.

Together, the extension and new facility are the first stage of the planned refinancing. Further refinancing of the near-term debt maturities is at an advanced stage of negotiations with agreed heads of terms, with a lender club comprising a number of the company's existing lenders. In our forecasts we assume this to be finalised at year-end FY23 but in reality, it may fall into FY24.

Exhibit 4: H123 debt portfolio*, prior to refinancing

Facility

Lender

Principal (£m)

Maturity

Capped interest

Facility LTV

Budget hotels 1

M&G

59.0

2023

2.71%

26%

Budget hotels 2

M&G

65.4

2023

3.35%

29%

Leisure facility

HSBC

60.0

2023**

3.20%

32%

RCF

Lloyds/NatWest

165.0

2024

2.95%

35%

Acquisition

Barclays/HSBC

385.0

2024

4.81%

33%

Merlin - B (€)

Blackstone

54.6

2025

4.95%

14%

Total 2023–25 expiry

789.0

4.03%

Healthcare 1

L&G

63.4

2026

4.29%

38%

Healthcare 2

AIG

294.9

2026

5.30%

42%

Term loan 1

Scottish Widows

55.0

2033

2.74%

29%

Term loan 2

Scottish Widows

40.0

2033

2.74%

Term loan 3

Scottish Widows

75.0

2033

2.99%

Total/average

1,317.2

3.2 years

4.20%

Source: LXi REIT. Note: *End-H123 debt adjusted for repayment of the £232m Merlin facility. **Subsequently extended to 2024 maturity.

As indicated by the new 15-year term loan, the blended cost of refinanced debt will increase and this is reflected in our forecasts. We have assumed an additional £565m of new debt facilities to be arranged, taking account of the £60m HSBC extension, the already agreed £150m term facility, and other forecast cash flow movements. Based on money market rates, we assume that most of this will be term debt and that c £100m will be RCF. In line with H123 guidance, we also expect the company to cap the SONIA exposure on the RCF at 2.5%, with an all-in running cost including margin of 5.0%. The aggregate estimated cost of the £715m of new borrowing is 5.6%, taking the total weighted average cost of total debt facilities to 5.0%.

Maintaining a diversified approach

Despite the addition of SIR’s more concentrated portfolio sector split, LXi retains the high degree of sector diversification, by income and by value, which it has pursued since IPO in February 2017.

Exhibit 7 shows the pre-merger standalone portfolios as at 31 March 2022 and the pro forma position at that time. Compared with LXi, the SIR portfolio was more concentrated by sector and tenant, but in each case in sectors in which LXi had relatively lower or no exposure (leisure, healthcare and budget hotels). On a combined basis, the resultant portfolio shows an increased balance across sectors. SIR tenants, Merlin Entertainments and Ramsay Healthcare became large tenants of the enlarged LXi (c 19% and 18% of total passing rent respectively) and the share of Travelodge budget hotels increased (from 6% to c 18%).

The Merlin assets include two of the UK’s top three resort theme parks by visitor numbers, Alton Towers and Thorpe Park, as well as Warwick Castle and all the on-site guest accommodation at the three attractions. It also operates two assets in Germany, the Heide Park resort theme park and hotel in Soltau, Saxony, the largest in Northern Germany. Merlin reported strong trading by the UK theme parks (around 80% of the Merlin rent roll is from the UK assets) in its half-year review, with robust consumer demand and elevated revenues per visitor, benefiting from the removal of COVID-19 restrictions. The leases with LXi are guaranteed by Merlin Entertainments, which owns all of Merlin’s operating businesses worldwide.

The Ramsay assets comprise11 freehold private acute hospitals across England. The acute care market has seen a good operating performance post pandemic, particularly in the private pay markets, with key operators reporting strong results. With its greater focus on NHS contracting, Ramsay’s performance has trailed that of peers coming out of the pandemic, but it should benefit significantly as the NHS seeks to address the waiting lists that built up.

The budget hotels subsector has continued to perform well, with both Travelodge and Premier Inn (together 21% of portfolio rents) reporting operating key performance indicators well ahead of pre-pandemic levels for the current year. Positive trading has resulted in strong investor sentiment in the sector, with the value of LXi’s assets up by 4.6% in H123. It is perhaps worth noting that budget hotels have historically outperformed the broad sector during recessions, benefiting from a ‘trading down’ effect. The trading challenges that Travelodge and Merlin Entertainments experienced during the pandemic were driven by lockdown restrictions more than typical, cyclical economic weakness.

Exhibit 5: LXi and SIR portfolios as at 31 March 2022, before the merger

Source: LXi REIT presentation. Note: LXi figures as at 31 March 2022, adjusted for the completion of certain asset acquisitions that had exchanged conditionally prior to 31 March 2022; SIR figures as at 31 March 2022.

(1) includes car parks, life sciences, garden centres, education and other sectors.

As at end H123, the portfolio comprised 348 properties across 13 property subsectors with multiple underlying uses, let on very long leases to more than 80 leading tenant operators. 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. The total rent shown in the table includes £0.6m in respect of properties where contracts have been exchanged but have not completed.

Exhibit 6: Portfolio summary at end-H123

Rent

Valuation

WAULT (years)

Indexed/fixed ren uplifts

Sector

£m pa

Share of total

£m

Share of total

Healthcare

45.1

22%

976.9

27%

16.0

100%

Budget hotels

41.7

21%

651.5

18%

21.0

100%

Theme parks

37.9

19%

629.9

17%

55.0

100%

Foodstores

18.9

9%

401.3

11%

16.0

95%

Industrial

14.3

7%

308.3

8%

23.0

100%

Pubs

8.7

4%

128.4

4%

25.0

100%

Arena

7.0

3%

99.2

3%

15.0

70%

Car parks

4.4

2%

81.5

2%

28.0

100%

Garden centres

3.2

2%

63.3

2%

31.0

100%

Life sciences

2.9

1%

61.9

2%

25.0

100%

Drive-through coffee

2.8

1%

40.5

1%

13.0

93%

Education

2.2

1%

39.8

1%

28.0

100%

Other

11.6

6%

174.1

5%

17.0

90%

Total/average

200.7

100%

3,656.6

100%

26.0

98%

Source: LXi REIT

The portfolio value is calculated on a ‘completed’ basis and includes the contracted rents on pre-let properties under construction.

Income benefits from inflation

Combined with the long WAULT, index-linked leases (mostly capped and collared) and fixed-uplift leases provide significant income protection against inflation. Conversely, fixed rents and rent collars (minimum uplifts to indexed rents) ensure continuing rent growth if inflation falls to low levels.

At end H123, 64% of contracted rent was inflation indexed (41% RPI and 23% CPI), while a further 34% was subject to fixed uplifts. Most indexed rents are capped at around 4% pa and collared at c 2% pa, meaning that, irrespective of the level of inflation, annual rent increases cannot rise above or fall below this band. Indexed rents provide visibility of rent growth but, where capped, will lag in real terms while inflation remains above c 4%. This is common in the long-income property sector, and it represents a fine balance between maximising short-term income against properties becoming over-rented9 or, in some cases, putting stress on tenants.

  A situation where current contracted rents are above market levels. This can have a negative impact on property values, especially as lease expiry approaches.

Across the portfolio, annual rent reviews apply to 57% of contracted rental income, enabling inflationary uplifts to quickly feed through to passing rents and cash flow. For the balance, mostly five-yearly review, the positive impact of current inflation will gradually feed through to passing rent over a longer period. At end H123, the annual rate of CPI was 10.1% and the annualised rate had averaged 9.6% over the preceding six months. The annual rate of RPI was 12.6%, having averaged 12.0% over the preceding six months. The 97 contracted rental uplifts in the period were broadly capped or fixed and delivered average growth of 3.7% pa, resulting in like-for-like rental growth of 2.5%.

We expect blended average like-for-like rent growth in H223 to accelerate to c 4% pa as five-year rent reviews capture more of recent inflation. For FY24 we expect full-year growth to moderate to c 3.0% as uncapped annual uplifts reflect the assumed slowdown in inflation and fewer five-year reviews fall due, partly offset by five-year reviews continuing to capture more of the recent inflation.

Exhibit 7: Portfolio rent review summary

Source: LXi REIT. H123 results presentation

Rental growth should provide support to portfolio value

While inflation has a positive impact on rental income, it has also driven up bond yields leading to a downward repricing of property values across all main UK commercial property sectors. During H123, the portfolio valuation yield widened by 40bp to 4.9%, although the impact on like-for-like valuation (-1.4%) was significantly offset by like-for-like rental growth of 2.5%. Across sectors, the valuation movements varied considerably, with a tendency for lower-yielding sectors to adjust more significantly. This was particularly the case for industrial assets, which showed the greatest reduction in value, while budget hotels and theme parks showed healthy gains driven by rental growth.

Exhibit 8: H123 like-for-like rental and valuation movements

Like-for-like valuation change

Like-for-like rental growth

Healthcare

-0.1%

2.7%

Budget hotels

4.6%

3.6%

Theme parks

5.3%

3.9%

Food stores

-8.4%

0.4%

Industrial

-12.5%

0.0%

Pubs

-0.7%

0.0%

Other

-1.6%

2.1%

Portfolio total

-1.4%

2.5%

Source: LXi REIT

The 10-year UK gilt yield has increased from below 1% at the beginning of 2022 to c 3.3%, having been as high as 4.5% in autumn 2022. Adding to asset pricing uncertainty across the market, institutional investment demand for commercial real estate has fallen sharply, creating a dearth of transaction-based market price evidence for valuers. The open-ended property retail funds sector is again under pressure to raise liquidity and even the pension fund sector has been forced to reappraise sector weightings. Indications from leading UK property consultants are that average UK commercial property valuations declined by c 15% in the final quarter of 2022 but that the decline has slowed significantly thus far in 2023.

While market valuation yields are widening, income growth has a positive impact. As of end H123, LXi calculates that the implicit growth in income over the five years from 1 October 2022, based on the RPI and CPI forward curves at the time of reporting the H123 results, and based on the prevailing portfolio value, would reflect a blended net initial yield (NIY) in September 2027 of 5.6% (versus 4.9% at end H123), or that the blended NIY could expand by a further 70bp, from 4.9% to 5.6%, (all other things being equal) before having any impact on the value. However, in the near term, market-wide NIYs are rising faster than the rental growth that we expect from LXi, indicating that LXi’s property valuations will fall further.

Our forecasts assume – and we stress assume given the uncertainties – that LXi’s property valuation yield will expand by a further c 0.5% in H223 (from 4.9% to 5.4%), equivalent to an almost 10% decline in property values. The outperformance versus the broad market implied by our forecast recognises the positive effect of indexed rental growth, significant exposures to relatively defensive sectors, and the Travelodge regear. We have assumed a flat like-for-like valuation in FY24, despite continued rent growth, increasing the average yield by around another c 0.2% to a portfolio blended net initial yield of c 5.6%. As market yields begin to stabilise, we would expect a recovery in property values, driven by rental growth.

Each additional 1% change in our 10% assumption is equivalent to EPRA NTA of c 2p per share.

Recent financial performance and forecasts

H123 showed strong underlying growth and the first contribution from the merger

The H123 results demonstrate LXi’s underlying growth but, while the SIR merger is fully reflected in the balance sheet, it contributed for less than three months to the income statement.

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

Exhibit 9: Summary of H123 financial performance

£m unless stated otherwise

H123

H122

H123/H122

FY22

Cash rental income

61.8

19.7

214%

48.6

Licence fee receivable

1.2

1.8

3.6

Amortisation of cash-backed rental top-ups and rent frees

0.3

2.3

3.2

Total adjusted income

63.3

23.8

166%

55.4

Investment Adviser fee

(6.2)

(3.3)

88%

(7.1)

Administrative & other expenses

(1.9)

(1.1)

73%

(2.2)

Adjusted operating profit

55.2

19.4

185%

46.1

Net interest expense

(15.2)

(3.0)

(6.8)

Tax

(0.6)

0.7

0.7

Adjusted cash earnings

39.4

17.1

130%

40.0

IFRS rent adjustments

13.7

5.7

9.9

Abortive fees

(1.4)

0.0

0.0

Adjusted earnings

51.7

22.8

127%

49.9

Exclude licence fee receivable

(1.2)

(1.8)

(3.6)

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

(0.3)

(2.3)

(3.2)

Include amortisation of loan fees

(2.3)

0.0

0.0

Include deferred tax

(1.1)

0.0

0.0

EPRA earnings

46.8

18.7

150%

43.1

Realised/unrealised gain/(loss) on investment property

(80.4)

55.5

117.7

Change in fair value of financial instruments

25.0

0.1

1.2

Loss on extinguishment of debt

(20.6)

0.0

0.0

IFRS earnings

(29.2)

74.3

162.0

Adjusted cash EPS (p)

3.1

2.6

18%

5.6

EPRA EPS (p)

3.6

2.8

28%

6.1

IFRS EPS (p)

(2.3)

11.3

22.8

DPS declared (p)

3.15

3.00

5%

6.00

EPRA dividend cover (x)

1.2

0.9

1.0

Adjusted cash dividend cover (x)

1.0

0.9

0.9

EPRA net NTA

2,422.3

948.5

1,299.5

EPRA NTA per share (adjusted to include Q223 DPS), (p)

139.7

135.5

142.6

EPRA NTA total return

0.1%

9.0%

18.2%

Portfolio value

3,656.6

1,216.6

1,544.4

Gross borrowing

(1,481.5)

(249.7)

(246.0)

Cash

114.3

24.6

72.5

Edison LTV (net debt/portfolio value)

37%

19%

11%

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

33%*

25.0

22.0

Source: LXi REIT, Edison Investment Research. Note: *H123 (33%) adjusts for the Merlin debt facility repayment just after period-end.

Key income statement developments are as follows:

H123 cash rental income increased 214% to £61.8m compared with H122 and, including adjustments for licence fee income10 and amortisation cash-backed rental top-ups,11 adjusted rental income was up by 166% to £63.3m. Expense growth was well below income growth, but net interest expense increased with higher borrowings and increased borrowing costs. Adjusted cash earnings increased 130% to £39.4m and by 18% to 3.1p in per-share terms, fully covering DPS paid. DPS declared increased by 5% to 3.15p.

  This is received by LXi from the developer in respect of funds advanced on forward-funded developments and accrues during the period between the initial investment and the commencement of rents.

  This is where a discount to the purchase price of a property is agreed with the vendor of an asset to cover rent-free periods or periods to the next rent review, based on the assumption of passing rents being ‘topped up’ to the level of contracted rents.

The most significant difference between adjusted cash earnings and EPRA earnings is the inclusion of non-cash IFRS rent smoothing adjustments in the latter. EPRA earnings increased 150% to £46.8m and EPRA EPS by 28% to 3.6p. The EPRA cost ratio was 12.6% versus 15.9% in FY22.

IFRS earnings, including revaluation movements and other items, was a negative £29.2m versus a £74.3m gain in H122. The c £80m negative property valuation movement recognised in the income statement includes the c £35m of costs associated with the merger, in accordance with IFRS accounting12 treatment.

  Accounting treatment for the merger recognised SIR as a property acquisition and the £35.3m associated costs were recognised as an addition to investment property and expensed through the profit and loss account as a fair value movement in the period, in accordance with IFRS.

Key balance sheet developments included:

The value of the investment portfolio was £3.7bn at end H123, a doubling versus H122 and up £2.1bn, or 137%, versus 31 March 2022 (FY22). The increase reflects the addition of SIR. The H123 like-for-like change in valuation (versus end FY22) was -1.4%, reflecting a widening of the valuation yield of 40bp to 4.9%, significantly offset by 2.5% like-for-like rental growth.

EPRA net tangible assets (NTA) increased by £1.1bn, or 86%, to £2.4bn, driven by the c £1.2bn value of shares issued in the SIR merger. EPRA NTA per share of 139.7p (adjusted to include the Q223 DPS declared) was 2.0% lower than at end-FY22

Exhibit 10: Reconciliation of H123 EPRA NTA per share movement

Source: LXi REIT

End-H123 gross drawn borrowings were also significantly increased by the SIR merger, from c £0.3bn to c £1.5bn, including the assumption of SIR debt (c £0.8bn) and the partial cash alternative accepted by former SIR shareholders (c £0.4bn).

The key assumptions in our forecasts include:

Allowing for the refinancing activity intended by LXi and described above, effective 31 March 2023 (end FY23) we forecast the average cost of debt facilities, all fixed/hedged will increase to c 5.0% from 4.2% at end-H123.

Based on the company’s comments, we have assumed modest net disposals of £30m although further transaction activity is highly likely.

A decline in the annual rate of CPI inflation from a little under 10% at end-FY23 to c 4% at end-FY24, and in RPI inflation from a little under 10% at end-FY23 to c 5% at end FY24.

We expect blended average like-for-like rent growth in H223 to accelerate to c 4% pa as five-year rent reviews capture more of recent inflation. For FY24 we expect full-year growth to moderate to c 3.0% as uncapped annual uplifts reflect the assumed slowdown in inflation and fewer five-year reviews fall due, partly offset by five-year reviews continuing to capture more of the recent inflation.

We forecast lower cost growth than revenue growth as the merger cost savings are realised, generating a further reduction in the already low (by sector standards) EPRA cost ratio.

We forecast DPS to increase from the 6.3p that LXi targets for FY23 to 6.6p in FY24.

A widening of the portfolio yield to c 5.4% at end-FY23, equivalent to an almost 10% H223 decline in average portfolio values. For FY24 we assume no change in portfolio values which, including rent growth, adds c 0.2% to portfolio yield.

Our property valuation assumptions result in an Edison basis net-LTV of c 31%-32% over FY23/FY24. On LXi’s look-through basis, we expect it to report an LTV of c 38% for FY23, with a small decline in FY24. Not included in our forecasts are further asset management initiatives aimed at LTV reduction, which may include lease regears and accretive asset recycling. Where assets with mature business plans, reflected in valuations, can be sold and the proceeds reinvested into assets with greater asset management potential, it may be possible to reduce borrowing and protect income.

Valuation

LXi shares offer a 6.2% FY23e prospective yield and trade at a c 25% discount to the H123 EPRA NTA per share of 141p, and a 14% discount to our forecast end-FY23 EPRA NTA per share of 121p. Since listing, LXi has on average traded at 1.0x NAV and the average, which is broadly in line with the average premium since listing of 1%. The valuation is at a similar level to what it was at the height of pandemic uncertainty, which quickly unwound. In the current environment, the portfolio lease structure provides growth in contractual income in both a high and low interest rate environment, while market expectations are that inflation will begin to subside and with it, the peak in interest rates will be reached.

Exhibit 11: Trailing dividend yield

Exhibit 12: Trailing price to NAV

Source: LXi REIT data, Edison Investment Research

Source: LXi REIT data, Edison Investment Research

Exhibit 11: Trailing dividend yield

Source: LXi REIT data, Edison Investment Research

Exhibit 12: Trailing price to NAV

Source: LXi REIT data, Edison Investment Research

In Exhibit 15 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 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, taking the last 12-month DPS declared and last reported NTA/NAV. Across this long-income group, the 12-month and three-year share price performance and valuation differ considerably, reflecting the varying fortunes of the subsectors on which most are focused. This variability underlines the potential attraction of an actively managed vehicle such as LXi, which has outperformed the peer group average over the same one-year and three-year period, to investors who seek but are otherwise unable to achieve an optimal diversification of risks. We also believe that LXi will have benefited from the strong inflation protection that its lease terms provide, both in absolute terms and relative to the peer group, within which some companies (eg primary healthcare investors) have a larger proportion of open market rents.

Exhibit 13: Peer group valuation and performance comparison

Recent WAULT (years)

Price
(p)

Market
cap (£m)

P/NAV*
(x)

Yield**
(%)

Share price performance

1 month

3 months

1 year

3 years

Assura

12

51

1,497

0.84

6.0

-5%

-7%

-25%

-30%

Alternative Income REIT

17

73

58

0.86

7.8

7%

1%

-8%

-16%

Civitas Social Housing

22

57

343

0.51

10.0

-9%

-2%

-35%

-37%

Impact Healthcare

20

97

401

0.87

6.8

-5%

-4%

-15%

-24%

LondonMetric

12

176

1,732

0.77

5.4

-8%

3%

-34%

-37%

Primary Health Properties

12

106

1,421

0.94

6.2

-3%

-2%

-27%

-30%

Supermarket Income

15

89

1,102

0.77

6.7

-8%

-13%

-27%

-34%

Target Healthcare

27

72

448

0.70

9.4

-11%

-5%

-34%

-40%

Triple Point Social Housing

26

47

190

0.43

11.6

-15%

-27%

-47%

-51%

Tritax Big Box

13

138

2,573

0.76

5.1

-10%

-1%

-43%

-45%

Average

17

0.72

7.6

-9%

-6%

-33%

-38%

LXi REIT

27

101

1,738

0.73

6.2

-13%

-10%

-30%

-34%

UK property sector index

1,309

-8%

1%

-31%

-34%

UK equity market index

4,017

-8%

0%

-1%

-9%

Source: Company data, Edison Investment Research, Refinitiv prices at 15 March 2023. Note: *Based on last reported EPRA NAV/NTA. **Based on 12-month trailing dividends declared.

Sensitivities

The broad commercial property market is cyclical, historically exhibiting substantial swings in valuation through-cycles. Income returns are significantly more stable, but still fluctuate according to tenant demand and rent terms. Some of this inherent cyclicality may be mitigated by portfolio diversification and LXi’s multi-sector approach enables it to adjust to changes in risk-reward across sectors. Its long, upward-only indexed leases provide security and predictability to contractual income, which may mitigate cyclical shifts in property yields/capital values and supports the use of long-term debt.

From a sector viewpoint, we also highlight the increased risks and uncertainties that attach to development activity, including planning consents, timing, construction risks and the long lead times to completion and eventual occupation. LXi is not a developer and, for the reasons discussed above, we believe its forward funding of fixed-price, pre-let developments, an investment strategy in which the investment manager has considerable experience, is very low risk and enhances returns. We consider the main sensitivities to include:

Economic risk: UK inflation is the highest in c 40 years, interest rates and bond yields have increased and the economy is slowing.

Real estate valuations: real estate transaction activity has weakened significantly and, across most sectors of the UK, real estate market prices are adjusting downwards to higher bond yields. A recessionary environment could further affect real estate valuations.

Funding risks: LXi’s long-term leases support its long-term, fixed-rate debt funding, locking in a positive yield spread over funding costs. The variable rates that apply to the more flexible RCFs are currently all capped. LXi reports that it is well-advanced in refinancing significant debt maturities over the next two years.

Inflation risk: LXi rents are substantially index linked, which provides investors with significant visibility of income growth in the current inflationary environment, while rent caps avoid the risk of properties becoming over-rented and support affordability for tenants. Fixed rents and collared rents provide an income floor if inflation is lower than expected.

Management risk: LXi is externally managed and is dependent upon the ability of its asset manager, Alvarium Fund Managers, to execute successfully on its strategy.

Exhibit 14: Financial summary

Year to 31 March (£m)

2018

2019

2020

2021

2022

2023e

2024e

INCOME STATEMENT

Cash rental income

7.7

18.6

33.1

34.4

48.6

156.3

192.7

IFRS rental adjustments

1.7

3.0

5.4

8.4

9.9

37.2

44.6

Total rental income

9.3

21.6

38.5

42.8

58.5

193.5

237.3

Investment Adviser fee

(1.4)

(2.3)

(4.5)

(4.4)

(7.1)

(12.7)

(14.0)

Administrative & other expenses

(1.0)

(1.2)

(2.1)

(1.5)

(2.2)

(5.8)

(5.0)

Operating profit before property & other valuation movements

6.9

18.0

31.9

36.9

49.2

175.0

218.3

Change in value of investment property

15.1

15.9

45.4

0.1

117.7

(427.7)

0.0

Gain/(loss) on disposal of investment property

0.1

3.3

1.2

6.3

0.0

(0.1)

0.0

Change in fair value of financial instruments

0.0

0.0

(0.1)

0.0

1.2

25.0

0.0

Net interest expense

(1.1)

(3.2)

(4.8)

(5.3)

(6.8)

(46.3)

(65.0)

Gain/(loss) on refinancing

0.0

0.0

0.0

1.9

0.0

(20.6)

0.0

Profit before tax

21.0

34.1

73.6

39.9

161.3

(294.7)

153.4

Tax

0.0

0.0

0.0

0.0

0.7

(1.7)

0.0

IFRS net income

21.0

34.1

73.6

39.9

162.0

(296.4)

153.4

Adjust for:

Realised & unrealised change in value of investment property

(15.1)

(19.3)

(46.6)

(6.4)

(117.7)

427.8

0.0

Change in fair value of financial instruments

0.0

0.0

0.1

0.0

(1.2)

(25.0)

0.0

Other EPRA adjustments

0.0

0.0

0.0

0.0

0.0

20.6

0.0

EPRA earnings

5.8

14.9

27.1

33.5

43.1

127.0

153.4

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

1.2

1.5

3.4

5.7

6.8

3.3

1.9

Amortisation of loan arrangement fees & other adjustments

0.0

0.0

0.0

0.0

0.0

5.7

4.6

Adjusted earnings

7.0

16.4

30.5

39.2

49.9

136.0

159.9

IFRS rental & other adjustments

(1.7)

(3.0)

(5.4)

(10.3)

(9.9)

(35.8)

(44.6)

Adjusted cash earnings

5.3

13.3

25.1

28.9

40.0

100.2

115.3

Period-end number of shares (m)

196.9

352.3

521.4

621.8

911.6

1,714.5

1,714.5

Weighted average number of shares (m)

138.6

267.6

485.4

526.1

710.2

1,501.7

1,714.5

IFRS EPS (p)

15.1

12.8

15.2

7.6

22.8

(19.7)

8.9

EPRA EPS (p)

4.2

5.6

5.6

6.4

6.1

8.5

8.9

Adjusted EPS (p)

5.1

6.1

6.3

7.5

7.0

9.1

9.3

Adjusted cash EPS (p)

3.8

5.0

5.2

5.5

5.6

6.7

6.7

DPS declared (p)

4.0

5.5

5.8

5.6

6.0

6.3

6.6

Dividend cover (EPRA earnings basis)

1.05

1.01

0.97

1.15

1.01

1.34

1.36

Dividend cover (cash earnings basis)

0.96

0.91

0.90

0.99

0.94

1.06

1.02

BALANCE SHEET

Investment property

255.2

511.5

809.7

887.5

1,480.1

3,568.7

3,666.7

Other non-current assets

0.0

0.0

0.0

0.4

0.0

0.0

0.0

Total non-current assets

255.2

511.5

809.7

887.9

1,480.1

3,568.7

3,666.7

Cash (unrestricted)

30.8

19.4

13.4

87.1

72.5

100.8

52.9

Restricted cash

17.9

43.2

0.0

0.0

0.0

0.0

0.0

Other current assets

6.9

5.9

10.6

15.1

40.3

58.8

59.4

Total current assets

55.6

68.5

24.0

102.2

112.8

159.6

112.3

Trade & other payables

(5.2)

(9.0)

(16.1)

(18.3)

(38.6)

(113.4)

(116.7)

Other non-current liabilities

0.0

0.0

0.0

0.0

0.0

(9.1)

(9.1)

Total current liabilities

(5.2)

(9.0)

(16.1)

(18.3)

(38.6)

(122.5)

(125.8)

Bank borrowings

(93.5)

(167.3)

(166.1)

(186.6)

(240.0)

(1,208.3)

(1,212.9)

Other non-current liabilities

0.0

0.0

(3.5)

(3.8)

(13.6)

(297.5)

(297.5)

Total non-current liabilities

(93.5)

(167.3)

(169.6)

(190.4)

(253.6)

(1,505.8)

(1,510.4)

Net assets

212.0

403.7

648.0

781.4

1,300.7

2,100.0

2,142.8

EPRA net tangible assets (NTA)

212.0

403.7

648.1

781.4

1,299.5

2,074.1

2,116.9

EPRA NTA per share (p)

107.7

114.6

124.3

125.7

142.6

121.0

123.5

EPRA NTA total return (including DPS paid)

11.9%

12.1%

13.4%

5.6%

18.2%

-10.8%

7.4%

CASH FLOW

Net cash flow from operating activity

2.7

19.5

25.8

28.9

51.4

167.6

176.5

Acquisition of investment property

(238.5)

(288.0)

(260.1)

(160.5)

(425.4)

(66.2)

(53.4)

Proceeds from sale of investment property

0.7

54.7

20.9

96.0

8.3

30.0

0.0

Other investment activity

0.0

0.1

0.4

0.0

(0.1)

(115.4)

0.0

Net cash flow from investing activity

(237.7)

(233.2)

(238.8)

(64.5)

(417.2)

(151.6)

(53.4)

Net proceeds from equity issuance

195.0

171.8

195.7

122.3

346.6

0.0

0.0

Dividends paid

(3.5)

(14.2)

(25.0)

(28.8)

(41.1)

(94.6)

(110.6)

Interest paid

(1.3)

(3.6)

(4.7)

(5.9)

(6.6)

(38.0)

(60.4)

Net debt drawn/(repaid)

77.1

49.7

43.2

22.3

53.7

147.1

0.0

Other cash flow from financing activity

(4.3)

(21.0)

(28.0)

(29.5)

(52.8)

(169.8)

(176.5)

Net cash flow from financing activity

265.8

202.3

207.0

109.3

351.2

12.3

(170.9)

Change in cash

30.8

(11.4)

(6.0)

73.7

(14.6)

28.3

(47.8)

Opening cash

0.0

30.8

19.4

13.4

87.1

72.5

100.8

Closing cash

30.8

19.4

13.4

87.1

72.5

100.8

53.0

Balance sheet debt

(93.5)

(167.3)

(166.1)

(186.6)

(240.0)

(1,208.3)

(1,212.9)

Unamortised loan costs

(1.5)

(2.7)

(3.9)

(5.7)

(6.0)

(12.2)

(7.6)

Net debt

(64.2)

(150.6)

(156.6)

(105.2)

(173.5)

(1,119.7)

(1,167.5)

Edison net LTV (net debt/balance sheet investment property)

33.6%

29.4%

19.3%

11.9%

11.6%

31.4%

31.8%

Source: LXi REIT historical data, Edison Investment Research forecasts

Contact details

Investment property value by geography

LXi REIT Advisors
10 Old Burlington Street,
London W1S 3AG
+44 (0)20 7195 1400
www.lxireit.com

Leadership team

Non-executive chairman, LXi REIT: Cyrus Ardalan

Partner and fund manager, investment adviser: John White

Cyrus Ardalan is non-executive chairman of LXi REIT. He is a highly experienced international investment banker with well-established corporate governance expertise and successful credentials as chairman. His career in capital markets spans more than 40 years, during which he has held senior executive and non-executive roles at leading global banks. He is currently chairman at OakNorth Bank and was previously non-executive director and chairman of a number of institutions, including Citigroup Global Markets, the International Finance Facility for Immunisation and the International Capital Markets Association. Cyrus spent 15 years at Barclays Bank as vice chairman overseeing a number of areas including the bank's public policy and government relations units. Prior to this, he held a range of senior positions at Paribas and the World Bank.

John White is a founding partner of the company’s investment advisor, LXi REIT Advisors. He entered the commercial real estate market in 1987 and, after qualifying as a chartered surveyor at Allsop, moved to the investment team at Cushman & Wakefield. There he became a partner and spent the next 18 years advising a range of institutional investor clients on their UK acquisitions and disposals across the full range of real estate subsectors including retail (in and out of town), offices (London, Thames Valley and regional cities), logistics and alternatives. John moved into private equity real estate in 2007 and co-founded Osprey Equity Partners in 2011 and LXi REIT Advisors in 2017.

Partner and fund manager, investment advisor: Simon Lee

CFO, investment advisor: Freddie Brooks

Simon Lee is a founding partner of the company’s investment advisor LXi REIT Advisors. He trained and practised as a solicitor at City law firm, Slaughter and May, from 1999 to 2006, following which he spent the next 10 years in private equity real estate, co-founding Osprey Equity Partners in 2011 and LXI REIT Advisors in 2017. Simon’s role covers a wide range of areas, including formulating investment strategy, raising equity and debt finance, asset selection, and negotiating and implementing transactions with vendors, purchasers, developers, investors, lenders and joint venture partners.

Freddie Brooks is CFO of the company’s investment advisor, LXi REIT Advisors. He leads on all strategic financial matters including fund reporting, budgeting and forecasting, treasury management and the monitoring of internal controls. Freddie is both a qualified chartered accountant and chartered surveyor (property finance & investment pathway). He has significant experience in the property sector and previously worked advising similar businesses at BDO, the number one audit firm and adviser to UK REITs, as well as with private property funds, developers and contractors.

Major shareholders (source: Refinitiv 16 March 2023)

(%)

Artemis Investment Management

8.0

BlackRock Institutional Trust Co.

5.8

Nick Leslau

5.6

Prestbury Investments

2.8

Quilter Investors

2.8

PHL Property

2.6

The Vanguard Group

2.5

Cohen & Steers

2.1

Columbia Threadneedle Investments

2.0


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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