LXi Reit posts mixed performance after merger

On 7 July, LXi Reit (LXI) completed its long-talked-about merger with Secure Income. In an instant, the long-income real estate investment trust (Reit) went from being a company locked in constant competition with its now former rival to being one of the top 10 biggest UK Reits by market cap: it’s now the seventh largest, below Derwent (DLN) and above Big Yellow (BYG).

LXi’s results for the six months to 30 September only shed light on the performance of the first two-and-a-half months of this larger company, but there are many things for investors to like about it. Its rental income tripled year on year, while the cost of operating this larger portfolio only doubled. As such, LXi was able to post a threefold increase in operating profit.

Second, despite the wider rout in the property market as rising interest rates put off buyers, LXi’s assets still look relatively desirable from a valuation standpoint – especially when compared with other Reits. LXi posted a 1.3 per cent fall in European Public Real Estate Association (EPRA) net tangible assets (NTA) over the six-month reporting period as LondonMetric (LMP) recorded a 12.2 per cent drop in NTA over the same period.

Still, despite the comparative strength of LXi’s performance, there is no getting away from the fact that its valuation decline caused it to swing to a £27.5mn loss. There is also little ignoring the large chunk of debt it has taken on in order to finance the Secure Income merger. At the time of its last results, posted in June, the Reit had debt equivalent to 13 per cent of its total equity; that has since jumped to 58 per cent.

These issues aside, LXi remains a healthy business that has overwhelmingly benefited from the merger deal. Buy.

Last IC view: Buy, 145p, 7 Jun 2022