LXI Reit (LXI ), the long-lease real estate investment trust (Reit), is providing the portfolio with a caffeine hit by funding the build of drive-thru coffee spots in Morrisons supermarkets.
The £817m Reit, which forward funds developments, has been ploughing cash into industrials, healthcare, and food-related assets through the pandemic, and has a particular preference for drive-thru coffee property.
Fund manager Simon Lee said drive-thru coffee outlets are ‘increasingly profitable for Starbucks and Costa Coffee due to footfall decreasing on the high street’ and the past year has given even more incentive for coffee lovers to use them as they offer a Covid-19-secure way of being served hot drinks.
Lee has teamed up with Morrisons (MRW) to fund the development of Starbucks drive-thrus in 14 locations where it has given over part of its carpark.
‘We forward fund them so we are not developing and taking the planning risk, the developer does all that,’ he said.
What Lee can bring is a package of funding for multiple small lots that would be difficult to find funding for individually.
‘[The cost] is £1m-£2m a piece and most people cannot forward fund that because it is too much effort for the lot size,’ he said.
Lee added the coffee outlets take a minimum lease of 15 years, that are reviewed against the retail price index, and the covenants are strong due to the size of Starbucks and Costa, which it also has separate deals with.
He said the Reit already has a rapport with Morrison having worked with the supermarket previously and was able to negotiate the deal off market and achieve a yield of 5.7%.
‘We have had interest in the [drive-thru coffee outlets] we already own at a 4.5% yield so that is a good uplift for us,’ he said.
‘The pandemic has accelerated our excitement in this area because drive-thrus stayed open during lockdown, the queues were one or two miles long for Costa.’
The food sector has boomed during the pandemic, with supermarket asset valuations soaring, but Lee has filled the portfolio with less headline-grabbing developments.
Rather than join the rush for the out-of-town and retail-park-located supermarkets, Lee spent £85m last month on smaller lot sizes of 18,000 to 20,000 square feet that will be let to Aldi and Lidl.
He has also been focused on small convenience stores rented to Co-op for local stores.
‘An area of food that has done well during Covid-19 is small convenience stores,’ he said. ‘Co-op local’s revenues are up 15%. It is profitable because they can charge more and they are expanding their services to click and collect and online deliveries.
The yield in this area has been advancing, with Lee stating large supermarkets are on a 4% yield and sometimes below that while the smaller Co-op local stores are yielding 5.5% to 6%. However, the good yields are slowly bringing increased competition to the smaller convenience store sub-sector and Lee said he is ‘done now’ in terms of buying supermarket assets.
Lee (pictured) has found one other less obvious way to play the food sector, by investing in garden centres. The portfolio already invests in two garden centres, which were gained as part of a sale and leaseback deal with the UK’s largest garden centre chain Dobbies.
Garden centres not only have remained open as essential retail throughout the pandemic, which Lee said put his tenants ‘in a great financial position’, but planning permissions around garden centres provide further opportunities.
‘One of the interesting things is because the planning consent for garden centres is wide, they are allowed to sell food,’ he said.
While it is not unusual for garden centres to have a tearoom or café, Dobbies has struck a deal with Sainsbury’s to stock 3,000 food and household good items.
‘It is a way to go under the radar to get access to the food sector without paying the sharper yields,’ said Lee.
‘We have two sales and leasebacks [with Dobbies] and we are looking at doing a couple more with them.’
The pandemic posed a challenge for LXI and the leisure sector investments it had in hotels and pubs. The company had to deal with budget hotel chain Travelodge entering into a company voluntary agreement (CVA), an insolvency arrangement that allows tenants to cut costs.
LXI, which rents 12 hotels to Travelodge representing 10% of rent, saw its rent reduced by 4.6% for the financial year ending March 2021, and 2.9% for the following 12 months.
However, Lee said despite Travelodge being ‘a pain in the neck, we maintained a good relationship’.
He said LXI had forward funded the hotels and was seen ‘we were a partnership rather than a landlord’ and under the CVA arrangement Travelodge released a ‘couple of plots of land for nothing’ that LXI would have had to pay for otherwise.
‘We sold them for £800,000,’ said Lee.
Lee believes the leisure assets will be a help rather than a hinderance over the next 12 months as hotels remain fully booked as everyone faces another summer of staycations.
‘It is one area [of the portfolio] that will bounce back particularly rapidly and there is good potential for valuation growth going forward,’ he said.
LXI shares have bounced back 34.4% from their pandemic crash lows a year ago, leaving the trust on a premium of 9% to its net asset value at the end of December with a dividend yield of 4%.
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