LXi REIT, the UK-listed investor specialising in the long income space, is eyeing bigger forward funding and sale and leaseback deals, as well as playing a possible part in future consolidation of the UK public property company sector as it closes in on a £3.9 bn (€4.56 bn) merger with Secure Income REIT (SIR).
An investor vote over the previously announced merger is expected to take place on 22 June at general meetings for LXi and SIR, with completion due on 6 July, assuming the ratification of shareholders is forthcoming. Simon Lee, fund manager at LXi, said that following investor meetings, ‘there seems to be good shareholder support for the deal on both sides'.
Ahead of the meetings, on Tuesday LXi revealed the strongest set of annual results since its IPO on the London Stock Exchange five years ago.
Said Lee: ‘We are in a good position on our own. But the merger is going to put us in an even stronger position to benefit from significant future growth opportunities to enhance total shareholder returns.’
For the year to 31 March, LXi has managed a total NAV return of 18.2% including NAV growth and dividends. It has managed that while growing net assets by 66.5% to £1.3 bn during the 12 months.
The long income specialist has enjoyed yield compression among its assets. It owns diverse investments from foodstores, industrial, hotels, and life sciences, to healthcare, car parks, drive-thru coffee shops, pubs, garden centres and education facilities.
It has kept a focus on assets linked to inflation and sees the merger with SIR as not only something worthy of shareholder support but also as a ‘good property deal’.
With interest rates rising, Lee said LXi’s pending increased scale should open the door to cheaper equity and debt finance both for acquisitions and for re-financings.
Its newest sectors have been life sciences and nursery school education. But other sub sectors are showing up on its radar.
Said Lee: ‘I think there are other sub sectors that we are quite interested in at the moment such thing as flexible offices whereby people are working near home. If we can find a good quality tenant operator taking a long lease with a flexible working-near-home environment then that is a sector that we’d like.’
‘I also think there is more to come in terms of nursery schools because of the supply-demand imbalance. We have seen that the values we acquired nurseries at have already gone up by 10%. We think there is more to come. I can see another 50 basis points of yield compression.’
Forward funding and sale leasebacks
LXi is currently looking at forward funding deals as large as £100 mln each, even up to £200 mln. This stratum of deal restricts the competitor field, which could mean investing at a 5% yield – higher than if a deal was around £50 mln. Some fresh forward funding investments LXi is contemplating are with existing as well as new tenants, added Lee. With the merger looming, such larger deals would not stress tenant/sector concentration risks. The same can be said of sale and leaseback opportunities.
International
The takeover of SIR will add one international asset – that of Heide Park leisure resort in Germany let to Merlin Entertainments. Investors set to vote on the merger are also being asked to consider allowing 5% of investments to be outside the UK. However, with the Merlin asset already being 4% and with plenty of opportunities still in the UK, LXi is not expected to rapidly expand in Continental Europe in the short term.
Consolidation
Tantalisingly, Lee pointed out it was not beyond the realms of possibility that within two or three years LXi could enter the bigger league as a member of the FTSE 100 – the top one hundred companies listed on the London Stock Market. LXi has a current market cap of £1.33 bn while SIR is at £1.55 bn, thereby creating a £2.88 bn entity upon merger. Currently, the smallest FTSE 100 company is media group ITV with a market cap of £3.5 bn.
Lee pointed to the ‘fragmented’ nature of UK REITs where consolidation could occur, mirroring what has occurred in the US: ‘I think the principle of becoming an aggregator of other REITs is appealing. There are perhaps too many smaller vehicles doing very similar things to each other. Capco and Shaftesbury are looking to merge, but there are plenty examples of smaller REITs. I think our merger will put us in a good position overtime to be part of that if it added value to our shareholders.’
