Shares in the Secure Income (SIR ) real estate investment trust jumped 10% today after the long-lease property fund agreed to merge with rival LXI (LXI ) and revealed its previously struggling hotel and leisure assets had rebounded in the first quarter to deliver a 12.1% return.

LXI shares dropped 3.6% as it revealed a more modest 2.8% rise in asset value in the first quarter and its shareholders took on board the rise in borrowing that their fund will incur from the reverse takeover.

Analysts welcomed the deal, however, which was first proposed last year. It creates a £3.9bn property giant offering investors long-term and inflation-linked rental income from a broad range of properties and tenants.

Under the transaction, LXI shareholders will hold 53% and SIR shareholders 47% of the combined group. SIR shareholders will receive up to £385m in cash and a like-for-like exchange of their shares with LXI based on their net tangible asset value on 31 March. They will still receive the next quarterly dividend of 3.95p declared last month.

Just under a third of independent SIR shareholders have indicated their support, including BMO Property Growth and Income Fund , TR Property (TRY ) investment trust and fund managers Artemis and Aegon.

After the merger completes, LXI’s fund manager LXI Reit Advisors will buy SIR’s fund manager Prestbury Investment Partners for £40m cash with its team signing two-year non-compete agreements and receiving no termination fee.

Prestbury founder Nick Leslau and chief operating officer Sandy Gumm will join LXI’s board as non-executive directors. They and their team will roll over around £140m, or three quarters, of their shareholdings in SIR, giving them a stake of around 5.8% in the enlarged trust.

Cyrus Ardalan, LXI’s new chairman who revived the merger talks, said: ‘We are delighted to be benefiting from the experience, talent and complementary investment strategies of the LXI Reit Advisors and Prestbury investment advisory teams.

‘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.’

SIR chairman Martin Moore said it was a ‘tremendous opportunity’ offering ‘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’.

Numis Securities analysts Andrew Rees and Colette Ord said the deal made strategic sense for both parties, but for LIXI the chance to buy a £2.3bn of properties free of stamp duty was an ‘incredible transformational opportunity’.

‘Based on the current LXI price of 135p, the value of taking up the 25% cash option (118.9p) and 2.488 shares, implies a value for SIR shares of 454.8p, which is close to the current SIR share price of 449p (shares are up 9% this morning).

‘We note that the LTV [loan to value] of the combined group at c.37% is higher than LXI shareholders will have been used to in recent years (25% at 30 September) but this is expected to reduce towards 30% over the longer term and the upcoming refinancing opportunities provide scope for further cost savings on this debt.’

The combined £3.9bn portfolio will have 346 properties that are fully occupied, generating a contracted annual rental income of £194m with a weighted average unexpired lease length of 26 years – one of the longest in the UK listed real estate sector. It is estimated the merger will save £8.6m in duplicated costs.

The merger follows hot on the heels of that of Shaftesbury and Capital and Counties, forming a West End property giant. Last year GCP Student Living was bought for £969m by a consortium backed by Dutch pension fund manager APG and Blackstone.

Launched in 2014, SIR had a narrower, three-sector focused portfolio whose exposure to budget hotel chain Travelodge proved problematic in the pandemic, although the properties bounced back more recently. Over five years the 3.8%-yielder generated a 45% total shareholder return, below the 66.6% from the more diverse LXI, which covered 10 sub-sectors.

SIR shares rallied 41p to 452p and LXI shed 5p to 137p.