If you ask an income investor what they would want from their ideal fund it would be a high, inflation-linked yield, with the prospect of long-term capital growth. Unfortunately there are not very many that fit the bill, which makes the LXI REIT (LON:LXI) something of a rarity.
LXI raised £138.2 million when it floated on the London Stock Exchange last February. It has used the capital to put together a diversified portfolio of UK properties that benefit from long-term index-linked leases. In October it successfully raised an additional £60.2 million and now has a market value of £214 million.
The managers look for properties with institutional-grade tenants where there is likely to be a strong residual value. This could be due to the strategic importance of the site to the tenant, opportunities for rental growth or the potential for an alternative use.
In its first set of results covering the period from launch to the end of March, the investment trust achieved an impressive increase in its EPRA NAV of 9.9%, with a NAV total return including the dividends of 11.9%.
Income attractions
The target dividend at launch was 3p per share for the first reporting period, but this was subsequently increased to 4p, which was fully covered by earnings. For the year ending 31stMarch 2019 the target distribution has been increased by 10% from 5p per share to 5.5p. This gives the fund a prospective yield of 5.1% with the dividends paid every quarter.
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At the end of March, the fund had a portfolio of 84 properties, with an average lot size of £8 million. These had a weighted average unexpired lease term to the first break in the contract of 24.4 years, with 90% of the rent being linked to either RPI or CPI and the rest subject to fixed uplifts or open market reviews.
It is a diversified portfolio that spans nine different sectors with the largest exposures being hotels, care homes and supported living, each of which account for just over 20% of assets. The properties are fully let to a total of 25 tenants including well-known companies such as Aldi, Lidl, Costa Coffee, Starbucks, General Electric, Greggs, KFC, Subway, Premier Inn and Travelodge.
Optimistic outlook
The managers are optimistic about the outlook for the current year with the fund likely to experience further capital growth as eight properties are expected to reach practical completion during the period. There should also be an increase in the rent roll with 55% of the rental income due to experience a review before the end of March.
Looking further ahead, they believe that there will continue to be a sustained demand for index-linked income. This should result in investors bidding up the value of the long lease sector, with the portfolio having already benefited from this effect.
LXI looks like a good bet for income investors, especially with the shares trading close to NAV. The main risk is that it is heavily tied in to the health of the UK economy, although the managers are obviously aware of this and have done what they can to diversify and protect the rental income and capital values.