The EG Interview: LXi REIT’s grande plans

Having suffered an almost-inevitable share price slump during the pandemic, long-income specialist LXi REIT has been given something of a caffeine boost during recent months – fitting given the investor’s new-found focus on drive-through coffee outlets. An equity issuance in March – its fourth since a 2017 initial public offering – was a roaring success, raising the company £125m compared to a target of £75m and bringing a raft of new investors onto its share register. Its share price is now close to its post-IPO high from late 2019. For Simon Lee, managing partner at LXi REIT Advisors, the next stage of the FTSE 250 company’s evolution is now looming, and he is looking across the pond for inspiration, specifically to companies such as Realty Income and other net lease investors buying single-tenant assets in which the occupiers pay not only the rent but all operating expenses. Lee wants LXi to become “a UK, European equivalent of them”. “In the UK we are relatively unusual as a long-income specialist that goes across subsectors,” he says. “In the US, there is a very mature market for what they call net lease REITs – across subsectors, with triple net income and relatively long leases. Those are back to a 40-50% [share price premium to asset value].” With a market capitalisation of about £844m, LXi REIT is some way off the scale of those big US names – Realty Income, which is merging with US peer Vereit, has a market cap of roughly $25bn (£17.7bn). Post-merger this is closer to $50bn. But Lee sees a growing awareness of what the REIT can offer – it has delivered an average annual NAV return of 10% since the IPO, he notes, pays a fully covered dividend and is now trading at a premium of roughly 11% to asset value. Its March fundraise brought on board investors from the US and Europe as well as REIT specialists for the first time. “What we started to tap into this time around was the US and European understanding of the US triple net REIT,” Lee says. “If we are at a 10-12% premium, that’s a good place to be. But you can see potential for further growth on that if, as is likely, we get more scale and we get more REIT specialists in.” Coffee time As LXi gears up to unveil annual results next week, foodstores have become the largest part of its £893m portfolio by sector, followed by logistics. “Our focus is generally the smaller square footage buildings,” Lee says of the foodstore focus. “First, it’s what the operators want today. They may be happy to continue with the 120,000 sq ft food stores, but it’s not where they would start if they could start from scratch. For the top four [operators], 40,000-50,000 sq ft is big enough – and then for the discounters, 20,000-25,000 sq ft.” The REIT has always stood by its decision not to focus on any one sector – as Lee says, that offers not only risk mitigation through diversification but also means that the company can react swiftly if it sees value and “genuine new growth” in a new part of the market such as, for example, drive-through coffee outlets and garden centres, both of which Lee expects to buy more of. LXi has tended to access the former through forward-funding deals, this week striking a deal to finance nine Costa drive-throughs in Morrisons car parks. Last year it forward-funded 12 Starbucks outlets.   Costa and Starbucks have expanded heavily on the drive-through. Not only is it something that’s been attractive during Covid, it’s the flip side of the reduction in footfall on the high street Simon Lee, LXi REIT Advisors “From an operational perspective, Costa and Starbucks have really expanded heavily on the drive-through,” Lee says. “Not only is it something that has been attractive during Covid, it’s the flip side of the reduction in footfall on the high street.” LXi was moving into this market before the pandemic struck, Lee says, but the lockdowns during the coronavirus crisis have only added to the assets’ appeal. “What the pandemic has done is further encourage us to buy more,” he adds. “It should sharpen the yield on the built assets. What we are always trying to do is have a decent arbitrage between what we pay as a prelet funding and what the assets are worth when they are built.” There is a similar story with garden centres, which remained open through the latter two of the UK’s three Covid-19 lockdowns. “The nice thing about garden centres is they’ve got very permissive planning consent that means you can sell pretty much anything you want to, including food,” says Lee, pointing to LXi tenant Dobbies, which has entered into a joint venture with Sainsbury’s to sell groceries and households goods in its centres. “For us, it makes it doubly secure,” Lee says. “Garden centres themselves are essential retail, but the food element makes it even more so.” Human relationships LXi is increasingly being brought deals by its own tenants – a big plus in a competitive market, Lee says. “The bigger we get, the more deals that we do, the more deals we get directly through tenants like Dobbies, like Aldi,” he adds. “Anything in the long-income space that hits the market goes for a very sharp yield because there is a lot of demand.” That requires an active, understanding relationship between asset owner and occupier – one that cannot be taken for granted during the pandemic. “Having direct relationships with your tenants is crucial,” Lee says. “You don’t want to be seen as a pure passive landlord that asks for the rent once a quarter. You want a human relationship, but you also want a leveraged, commercial relationship.” He points to “the extreme example” of hotel chain Travelodge, an LXi tenant, and its CVA last year. “The relationship that we had with them was not just a passive landlord because we forward-funded most of the assets for them,” Lee says. “So they saw us as more of a joint venture partner there to help grow their business. “That had concrete positive repercussions for us in two ways. Under the CVA, 50% of our assets were treated as category A [meaning no rent reduction] whereas that was only about 10% of the wider Travelodge portfolio for everyone else. Secondly, we renegotiated what were the standard CVA terms for us post the CVA – our leverage there was that we are a forward-funding partner.” To come out of any of the challenges from the Covid crisis feeling relatively unscathed is no small feat. But with LXi’s last equity raise now fully invested after its latest coffee deal, Lee and the team are finding reason to feel fired up.   To send feedback, e-mail tim.burke@eg.co.uk or tweet @_tim_burke or @EGPropertyNews Photo: LXi REIT