LXi REIT, the UK-listed investor, is pursuing a merger with fellow UK public property company, Secure Income REIT (SIR), to create a group with £3.9 bn (€4.57 bn) of assets and 346 properties.
In a move that would alter the make-up of the UK listed real estate sector, the merger, if it goes ahead, would create a new top 10 player.
LXi owns a portfolio valued at £1.594 bn. Its 186 assets are fully occupied. Some 27% is in the food and essentials real estate category, 22% industrial, 13% hotels, 7% healthcare and 30% ‘other’.
Meanwhile, SIR has a £2.3 bn portfolio comprising 160 properties, also fully let. The portfolio is markedly different, with some 44% being in the leisure sector, 38% in healthcare, and 19% in hotels.
A feature of the companies is the percentage of inflation index-linked leases, with 73% of LXi’s agreements have inflation-linked upward only rent review structures, while 58% of SIR’s assets are inflation-linked.
On Wednesday, LXi said the strategy would continue to be focussed on long income properties across a range of ‘structurally supported’ real estate sectors.
The combined group will be active in 10 different property classes.
By 2.30pm on Wednesday, shares in LXi dropped 3.67%. However, shares in SIR rose 9.12%. A spokesperson said the transaction was a NAV for NAV deal and that shares in LXi traded at a premium to its 143.4 pence NAV per share while SIR’s shares traded at a discount to its NAV per share of 475.5 pence.
Should the merger complete, Amalfi - an entity financed by shareholders of LXi REIT Advisors - will pay £40 mln to the investor advisor to SIR, Prestbury Investment Partners, which took SIR onto the junior part of the London Stock Exchange in 2014. SIR’s investment adviser is transferring a stake into LXi, worth more than £140 mln.
Prestbury is led by Nick Leslau, Mike Brown, Tim Evans, Sandy Gumm, and Ben Walford. They have agreed to a 2-year non-compete arrangement subject to some exceptions.
Leslau and Gumm will become non-executive directors while other members of Prestbury management will become advisors to LXi REIT. Some staff will also transfer.
The acquisition is structured as a mix of shares and a partial cash alternative. Ultimately, LXi would end up owning 53% of the new enlarged group while SIR would own 47%.
The cash component would be funded by a £385 mln acquisition facility with a maximum term of 24 months.
LXi REIT Advisors, which advises the REIT, has agreed to lower its fee scale.
Cyrus Ardalan, chairman of LXi said: ‘In today's investment climate, more than ever, security and resilience of cash flows, scale and liquidity, underpinned by clear and compelling strategic direction and cost efficiency are essential components of successful REITs.’
‘The planned merger of the strongly performing businesses of LXi and SIR will create a substantial, complementary portfolio of attractive operating assets let on long-term, index-linked leases to a diverse group of strong tenants across a diversified mix of robust property sectors.’
Martin Moore, chairman of SIR, added: ‘The combination of these two proven, substantial, complementary inflation-protected portfolios, will result in further diversification, significant growth opportunities, access to lower cost of capital, potentially increased share trading liquidity and lower management costs on a faster timescale than we would otherwise achieve.'
'It is a tremendous opportunity. Both boards share a common investment philosophy, where growth and a prudent approach to risk management are fundamental components.’
Rothschild & Co is advising SIR, while Jeffries is advisor to LXi. Legal advisor to LXi is Stephenson Harwood. Bryan Cave Leighton Paisner is legal advisor to SIR.
