LXi’s collapsed £500m deal highlights REIT woes

LXi REIT’s collapsed deal to buy a circa £500m Sainsbury’s portfolio marks the first real estate casualty of the stock market turbulence of recent days, amplified by reaction to the government’s mini-Budget on Friday. The long income-focused REIT said last week that it had exchanged on a sale-and-leaseback deal to buy 18 Sainsbury’s stores and was planning a fresh equity raise to help pay for the properties. Today the company said that having held discussions with shareholders, it was pulling the purchase and the fund raise “given the current stock market volatility”. Sources close to the situation, who did not wish to be named, said LXi remained interested in supermarkets and convenience retail given their defensive nature in a downturn, but that its shareholders “would not thank it” for issuing shares at a discount to its last reported net tangible asset value. That stood at 143p per share at the end of March. Shares in LXi REIT fell by 9.5% after it disclosed the deal last week, ruling out an NTA-accretive equity raise. Ahead of market close today, its share price inched down this afternoon by 0.5% to 127p. James Carswell, analyst at Peel Hunt, said the deal’s collapse was purely linked to share prices and he did not expect it to reverberate across the supermarket sector. The deal would have relied on raising equity, with the balance of the purchase price part-funded through a debt facility. Carswell said: “It is unfortunate. The management team has done a great job to date, but it has been unlucky with timings. “It cut a good deal – it is an attractive acquisition – but the last eight days of stock market movement in the listed REIT sector has been terrible. It’s a shame, the stock market fell away and they couldn’t fund the deal the way they wanted to. “Real estate share prices were under pressure in the run-up to the mini-Budget anyway, but the macro impact of the mini-Budget has led to higher expectations for future interest rates in the short term, which is bad for the sector.” Equity deals stall As one of the few companies trading at a premium to NTA until only a few weeks ago, LXi could consider doing a part equity-funded transaction. However, stock market volatility has meant that it has now joined its REIT peers, with most already trading at modest if not large discounts to NTA. “We have not seen much equity issuance across the board for the past couple of months, and we won’t [for the foreseeable future],” said Carswell. Carswell said the market needed “to get more comfortable” around pricing and valuations. “Until we see property transactions going through in lots of sub-sectors post-sterling and interest rates [moves], it is hard to know what the true discount is,” he said. “Until the equity market gets more comfortable around listed REITs, you won’t see a floor to [NTA]. The quicker that repricing happens, the better.” John Cahill, analyst at Stifel, said: “LXi’s share price has fallen almost 10% since it said it would acquire a portfolio of Sainsbury’s supermarkets, and today’s withdrawal from the deal, while the right thing to do in response to the weakening of the share price and volatile markets, could add to downward pressure in the short term as the sector settles at a new, lower level.” While Cahill described the turbulence caused by the failed deal as “unfortunate”, he was upbeat that the REIT’s shares would outperform in the longer term. “The shares are trading at a 13% discount to current NTA, which compares favourably with the average UK REIT discount of 32%, reflecting the strength of earnings from its diversified long-duration portfolio,” he said. Supermarkets still going strong While supermarkets are still broadly regarded as a resilient asset class – Sainsbury’s, for one, is pressing ahead with plans to acquire 21 store freeholds – industry observers said the outlook for grocery stores should still be viewed with caution. Carswell said the likes of Supermarket Income REIT’s portfolio had an average rent of around £25 per sq ft, whereas the deal that LXi was striking with Sainsbury’s stood at £17.25 per sq ft. Prime supermarket yields have also moved out significantly in the past few months. “It is a clearly defensive and well-positioned asset class, but our worry for some time is the risk around over-renting,” he said. “It is not immune to risks, particularly around rising interest rates.”   To send feedback, e-mail pui-guan.man@eg.co.uk or tweet @PuiGuanM or @EGPropertyNews Image from Pixabay/Pexels