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LXI Reit raising £100m as open-ended funds drop deals

20 May 2019

Long-lease real estate investment trust launches share issue to take advantage of string of opportunities including property purchases being dropped by rival open-ended funds under Brexit pressure.

LXI (LXI), a two-year-old long-lease, real estate investment trust (Reit), is looking to raise another £100 million as its fund managers take advantage of a string of opportunities which include property purchases being dropped by rival managers of under-pressure open-ended funds.

John White, co-fund manager of the £590 million portfolio, said in recent months the team had gained access to stock they wouldn’t previously have been able to as the managers of big open-ended property companies pulled out of deals due to a surge in withdrawals from their funds by investors worried by Brexit.

With money flowing out of their funds as investors worry of a re-run of 2016 when open-ended funds were forced to suspend trading in their shares after the shock EU referendum result, temporarily locking in investors, their fund managers are under pressure to dispose of properties rather than buy more.

That has created buying opportunities for ‘closed-end’ investment trusts like LXI and Regional (RGL), which reported the same trend in its annual results last month. Their structure means investors can sell their shares at any time – even if they do sometimes trade well below their underlying net asset value (NAV).

This gives the fund managers a permanent pool of capital which means they can avoid being forced sellers in a downturn and can even buy bargains when other investors run scared.

‘Retail funds going into redemption have had to drop a number of deals,’ said White. ‘We’ve seen properties that had been under offer at prices that we wouldn’t have wanted to pay.’

No interest in rival AEW

Far from trading at a discount to NAV, LXI shares until today had stood at a high 18% premium above their asset value. This reflects strong investor demand for a portfolio whose 108 properties have rents that are almost all either linked to inflation or have fixed annual uplifts over long leases averaging 22 years.

By contrast, smaller rival AEW UK Long Lease Reit (AEWL) trails on a lowly 13% discount, having de-rated after the board last month served notice on its fund manager and launched a strategic review after the collapse of its largest tenant. Fund manager Simon Lee indicated LXI was not interested in getting involved.

LXI could do without the distraction. Annual results today showed it generated a 12.1% total return on net assets in the year to 31 March, ahead of its targeted average annual return of at least 8%.

The growth in NAV underpinned a more dramatic 30.7% total shareholder return. This reflects the way the shares started to motor a year ago following the publication of maiden annual results, which impressed investors with a 4p per share covered dividend, ahead of a 3p target, and good gains on property sales.

Dividends have continued to impress with the company lifting dividends by more than a third to 5.5p last year, again covered by adjusted earnings per share of 6.11p, and announcing a targeted increase of 4.5% to 5.75p this year.

Share issue

That high share price rating is enabling LXI to raise more money, just eight months after the company last drew £175 million in a share issue backed by Spanish Bhavnani banking dynasty, having attracted around £200 million after floating in February 2017.

The company is offering up to 84.5 million new shares, which if issued would increase its share capital by 19%, although the fund raise could be doubled to £200 million if there is sufficient demand.

The shares have been priced at 114.6p, 9.5% less than LXI’s closing price of 130.4p on Friday, prompting the stock to fall 4.5p or 3.4% to 126p today.

Existing investors will get the chance to buy six new shares for every 25 they hold while new shareholders will new investors will be able to subscribe through stock brokers.

Crucially, the issue price is 3% above LXI’s NAV per share of 114.6p at the end of March, a premium that ensures existing investors do not pay for costs of up to 2% of NAV for issuing the shares.

Not all Reits do this. In the past 18 months, Regional, Tritax Big Box (BBOX) and Warehouse (WHR) have all issued new shares below NAV, with Regional flagging up earlier this month its desire to issue more shares even though it trades on a 6% discount.

Lee said ‘we would not really like to come out with a discount unless there were compelling reasons to make an accretive acquisition.’

No ‘big box’ or ‘last mile’

LXI’s properties are spread across nine sectors, although nearly three quarters of its assets are in budget hotels, industrial properties and healthcare properties, which it regards as defensive areas enjoying good demand from positive structural changes.

In industrial, Lee said LXI avoided both ‘big box’ large, modern warehouses and small, localised ‘last mile’ urban depots, which have become expensive, preferring hybrid properties that offered companies a head office with a main warehouse which offered better value.

White said the managers would look to use new money from the share issue to add to sectors where they had less exposure. That suggests more discount foodstores for Aldi and Lidl, which are already among its biggest tenants, or leisure properties and student accommodation.

The pipeline of potential investments is priced on an average initial yield of 5.6% and unexpired leases of 25 years. This is slightly more expensive than the current portfolio which where new investments were made at an average yield of 5.8%.

Ewan Lovett-Turner, analyst at Numis Securities, commented: ‘LXI has been our preferred stock in the long-lease space for some time, reflecting our view that the manager continues to acquire well, crystallise uplifts and recycle capital swiftly, driving attractive returns ahead of its 8% pa target

‘Shareholders may well view the current equity raise as an opportunity to buy the shares at a lower premium to NAV,’ he added.

The share offer is being run by broker Peel Hunt and closes on 12 June.

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