There is strength in numbers for LXI Reit (LXI) when it comes to spreading its investments across asset types. The commercial property group develops and lets properties across nine defensive property sub-sectors (see CHART), generating a secure rental income stream and allowing the group to pay a generous dividend that is covered by earnings.
Long-dated leases
Inflation-linked income
Diverse and defensive portfolio
Strong record since float
Shares valued at premium to NAV
Some retail exposure
LXI listed almost three years ago and since then has built both an impressive track record and an impressive property portfolio that's rented out to 50 tenants including the likes of Premier Inn, Johnson Matthey and Alidi. The beauty of the portfolio for income hunters is not only its defensive and diverse nature. Certainty about income is bolstered by an average lease length of 22 years before the first option to break the agreement.
Also significant is the fact that 57 per cent of leases by value are linked to retail price index (RPI) inflation, a further 20 per cent to consumer price inflation, while another 19 per cent contain fixed uplift rent reviews. This bodes well for future rental growth given annual RPI rises are forecast at 3.0 per cent from 2019 to 2023, compared with 0.5 per cent growth in open market rents, according to the International Property Forum. The flipside of such favourable lease terms is that almost three-quarters of rental income is capped at 4 per cent growth a year, which would be an issue were there a major change in inflation expectations.
The group does not carry out any speculative development, but it does forward-fund projects that are pre-let, targeting an average fair value increase of 11 per cent above acquisition price, excluding purchase costs. At the end of September, the company had forward funded £95m in developments due to complete before March 2020, which could provide a further boost to net asset value (NAV) over the second half of the current financial year. LXI is already on course to outperform its annual 8 per cent NAV total return target – including dividends – after generating a return of 6.8 per cent over the first half. Since IPO, the company has generated an annual NAV total return of 12.8 per cent.
The shares are priced at a 13 per cent premium to the last disclosed NAV at 31 September 2019 (brokers do not forecast NAV for LXI so the accompanying table only contains historic full-year numbers). While on the surface this may look expensive compared with the small discount boated by shares in closest UK-listed peer UK Commercial Property Reit (UKCM), unlike UKCM, LXI offers the virtue of a dividend that is fully covered by underlying income. Cover last year was 1.1 and 1.02 for the first half of the current year.
LXI REIT (LXI) | ||||
ORD PRICE: | 135p | MARKET VALUE: | £702m | |
TOUCH: | 134-135p | 12-MONTH HIGH: | 141p | LOW: 116p |
DIVIDEND YIELD: | 4.1% | TRADING PROPERTIES: | nil | |
PREMIUN TO NAV: | 17% | NET DEBT: | 18% | |
INVESTMENT PROPERTIES: | £744m |
Year to 30 Mar | Net asset value (p)* | Pre-tax profit (£m)* | Earnings per share (p)* | Dividend per share (p) |
2018* | 108 | 21.0 | 15.1 | 4.00 |
2019 | 115 | 34.1 | 12.8 | 5.50 |
% change | +6 | +63 | -16 | +38 |
Normal market size: | 3,000 | |||
Beta: | 0.31 | |||
*Period from incorporation in Feb 2017 |