UK long-income REIT LXi has sold a 65-year 'income strip' representing 30% of the annual rental income received from the company’s Thorpe Park and Alton Towers assets, operated by Merlin, to a UK institution for £257 mln (€299 mln).
The sale reflects a net initial yield (NIY) of 2.96%; the latest book value of the freehold interest in the properties is a 4.25% NIY.
The innovative transaction comprises the sale of the freehold in the properties to the buyer, with 999-year leases granted back to the company, for which LXi pays the buyer an annual aggregate rent of £8.2 mln (reflecting a small proportion of the underlying EBITDA generated by Merlin).
The company can acquire the freehold back from the buyer for a nominal price of £1 in year 65, hence the term 'income strip'.
Simon Lee, fund manager of LXi REIT, commented: 'We are delighted to have signed this innovative transaction, which materially reduces the Company’s debt levels whilst generating significant earnings accretion.'
The company retains both 70% of the rental income for the properties, along with the freehold and all reversionary value after 65 years. The properties are let to Merlin with 55 years unexpired until first break, with a 35-year extension option on expiry.
Rental payments due under the Merlin leases will remain unchanged with annual uplifts of CPI+0.5% with a floor of 1% and a cap of 4% per annum, with increases shared between the company and the buyer during the term of the 'income strip'
LXi will use the sale proceeds to fully repay the £232 mln of debt currently secured against Thorpe Park and Alton Towers, as well as Warwick Castle, also operated by Merlin.
The cost of the debt is 4.95% per annum. The debt repayment reduces LXi's pro forma LTV from 37% to 33%, in line with its aim of maintaining a medium-term LTV target of 30%.
LXi also expects the transaction to be NAV accretive.
