Annual results for the year ended 31 March 2023
07/06/2023 07:00
For best results when printing this announcement, please click on link below:
http://newsfile.refinitiv.com/getnewsfile/v1/story?guid=urn:newsml:reuters.com:20230607:nRSG8750Ba&default-theme=true
RNS Number : 8750B LXI REIT PLC 07 June 2023
7 June 2023
This announcement contains inside information for the purposes of Article 7 of
the Market Abuse Regulation (EU) No 596/2014. This announcement has been
authorised for release by the Board of Directors
LXi REIT plc
("LXI", the "Company" or the "Group")
ANNUAL RESULTS FOR THE YEAR ENDED 31 MARCH 2023
LXi REIT plc (ticker: LXI), the specialist inflation-protected very long
income REIT, announce its annual results for the year ended 31 March 2023.
Cyrus Ardalan, Chairman of LXI REIT plc, commented:
"The successful merger has created a platform from which we will be able to
grow the Group even further, leveraging our scale and low-cost base.
Notwithstanding the very challenging wider economic headwinds, we remain
confident that the underlying characteristics of our carefully curated
portfolio, supported by our proactive recycling of capital and asset
management strategies, will enable the Group to continue to outperform.
Challenging markets often throw up interesting opportunities and we intend to
take advantage of them as and when they do.
With forecasts for inflation stabilising and the working assumption, all
things being equal, that interest rates are peaking, we believe the property
market repricing will begin to slowly reverse in the second half of the
calendar year. Property values appear to have stabilised since the year end.
Those with robust defensive qualities tend to rebound the quickest,
particularly in tougher economic climates where capital chases well let,
secure, long- term investments with built-in inflation protection.
The Group continues to deliver progressive dividend growth supported by our
index-linked rents, fixed debt costs as well as accretive asset management
targeting a fully covered dividend of 6.6p for the year to 31 March 2024,
representing an increase of 5% on the prior year.
Going forward, we remain focused on managing both the risks and opportunities
that our portfolio presents. We remain confident in our ability to
successfully capitalise on the growth opportunities that we continue to
identify and on continuing to provide a secure and growing income return to
our investors. This will enable us to continue to enhance and unlock
sustainable value in our defensive, resilient portfolio for all of our
stakeholders."
Financial highlights
Alternative performance measures 31 March 31 March Change
2023 2022
EPRA EPS 8.3p 6.1p +36.1%
Adjusted cash EPS 6.7p 5.7p +17.5%
Dividend per share 6.3p 6.0p +5.0%
EPRA cost ratio (including and excluding vacant property costs) 9.5% 15.9% -6.4pts
Total Expense Ratio 0.9% 1.0% -0.1pts
Total accounting return (10.7)% 18.2% -28.9pts
Portfolio value(1) £3,356.3m £1,544.4m +117.3%
EPRA NTA per share ( ) 121.1p 142.6p -15.1%
Pro forma net LTV(2) 37% 22% +15pts
IFRS performance measures Year to Year to Change
31 March 31 March
2023 2022
Rental income £198.2m £58.5m +238.8%
Operating profit before fair value changes £179.4m £49.2m +264.6%
Earnings per share (19.2)p 22.8p -184.2%
As at As at Change
31 March 31 March
2023 2022
Investment property at fair value(1) £3,601.9m £1,499.1m +140.3%
Net assets £2,108.1m £1,300.7m +62.1%
NAV per share 123.0p 142.7p -13.8%
· EPRA earnings per share ("EPS") up 36.1% to 8.3p (31 March
2022: 6.1p), and Adjusted cash EPS up 17.5% to 6.7p for the year (31 March
2022: 5.7p), primarily driven by material cost savings resulting from the
merger with Secure Income REIT plc ("SIR plc") (the "Merger") and representing
full dividend cover for the year, underpinning the Company's progressive
dividend policy
· Sector leading EPRA cost ratio of 9.5% (31 March 2022: 15.9%)
and total expense ratio of 0.9% (31 March 2022: 1.0%)
· Dividend per share of 6.3p in respect of year (31 March 2022:
6.0p per share), representing 5% growth on the prior year
· Portfolio independently valued at £3,356.3m (31 March 2022:
£1,544.4m), reflecting a like for like change of (9.6)%. The movement
reflects an outward yield shift of 90 bps to 5.4% at 31 March 2023 (31 March
2022: 4.5%), offset by 2.3% like for like rental growth
· EPRA NTA per share of 121.1p (31 March 2022: 142.6p),
reflecting a fall of 15%, primarily driven by yield expansion across certain
property sectors in response to wider economic conditions and the costs
associated with the Merger, which represented less than 1% of the combined
portfolio value(1)
· Pro forma net loan to value ("LTV")(2) ratio of 37% (31 March
2022: 22%), with headroom to our medium-term borrowing policy cap of 40% and
substantial covenant headroom on the loan facilities
· Contractual rental increases due in the next two financial
years expected to reduce LTV to 35.5% in FY24 and 33.8% in FY25, assuming no
change in valuation yield. The Board remains committed to a conservative
medium-term LTV target of 30%
The UK's leading sector diversified, long income REIT
· During the year, LXi REIT plc merged with Secure Income REIT
plc to create the UK's leading sector-diversified, long income REIT, with a
substantial, defensive and resilient portfolio
· The scale achieved provides a strong foundation to deliver
secure attractive long-dated and growing income returns and capital protection
to our shareholders
· The Group owns an inflation linked portfolio of 350 properties
that are 100% occupied with an aggregate valuation of £3.4bn at 31 March
2023, contracted annual rental income of £202.2m and a WAULT to first break
of 27 years
· Assets are well diversified across a broad range of resilient
sub-sectors with high barriers to entry, strong underlying property
fundamentals and low starting rents, and are let on very long-term leases to
tenant counterparties that have demonstrated strong performance throughout
previous economic cycles
· Properties are strategically important to the operations of our
broad range of institutional-quality tenants underpinning the longevity and
security of the Group's income streams
· Shareholders continue to benefit from the certainty provided by
the Group's fully let, highly diversified, triple-net portfolio of secure real
estate assets, sector leading expense ratios and a conservative and 100% fixed
or capped debt position
Portfolio summary
As at As at
31 March 31 March
2023 2022
WAULT to first break 27 years 21 years
Number of assets 350 193
Number of tenants 84 71
Let or pre-let 100% 100%
Portfolio diversification by sector (by contracted rent)
- Healthcare 22% 8%
- Budget hotels 21% 13%
- Theme parks 19% -
- Foodstores 10% 25%
- Industrials 7% 18%
- Others 21% 36%
Rent review type (upward only)
- RPI 26% 54%
- CPI 38% 19%
- Fixed 34% 23%
- Open market 2% 4%
Regular predictable rental growth profile
- Annual reviews 56% 37%
- Five-yearly reviews 44% 63%
- Capped indexed linked uplifts 60% 67%
- Average cap 3.9% 3.6%
- Collared index-linked uplifts 56% 54%
- Average collar 1.2% 1.5%
Post year end highlights
Dividends
· Announced increased dividend target of 6.6p(3) per share for
the year ending 31 March 2024, up 5% on the dividend per share in respect of
the year ended 31 March 2023
· Announced a dividend of 1.575p per share for the quarter ended
31 March 2023, meeting the Company's annual dividend per share target of
6.3p(3)
Debt refinancing
· Completed our significant refinancing programme comprising:
o A new £565m three and five-year term loan and five year revolving
credit facility, and
o A new £148m 16-year debt facility
· Achieved maiden investment grade rating and increased weighted
average term to maturity of 6 years (pre refinancing: 2 years) and a weighted
average interest cost of 4.7% pa (pre refinancing 4.3% pa)
Outlook
· The Group's substantial scale should allow it to benefit from
growth opportunities within our portfolio as well as in the wider market. The
Company has already begun to do so, with the earnings and NAV accretive Merlin
'income strip' transaction and the Travelodge re-gear
· The Board expects the Company and its shareholders to continue
to benefit from significant merger synergies, with the Group now having one of
the lowest cost ratios in the UK listed real estate sector. We have already
begun to see the positive impact of this on our income returns during the year
and the Board remains confident that the next year's results, which will
comprise a full year of the combined business, will further demonstrate this
benefit
· We see exciting opportunities in the market in the form of:
o a significant pipeline of assets through permanent structural change
within open-ended funds that have traditionally held vast prime long income
portfolios;
o corporates facing a cliff-edge of refinancing events as their historic,
low-cost bonds mature that we expect will create a source of new, long income
stock through sale and leasebacks;
o the opportunity for consolidation in the long income sector, due to share
price discounts and a range of sub-scale platforms that fail to provide
desired liquidity and downside protection. The scale and diversified nature of
our portfolio and investment strategy and the demonstrated expertise and
skills of our management team put the Company in a strong position to
capitalise on these opportunities; and
o value opportunities in our existing portfolio through lease re-gears,
strengthening relationships with our key tenants and other asset management
initiatives.
· Notwithstanding the very challenging wider economic headwinds,
we remain confident that the underlying characteristics of our carefully
curated portfolio, supported by our proactive accretive recycling of capital
and asset management strategies, will enable the Group to continue to deliver
outperformance
FOR FURTHER INFORMATION, PLEASE CONTACT:
LXI REIT Advisors Limited Via H/Advisors Maitland
Simon Lee (Partner, Fund Manager)
John White (Partner, Fund Manager)
Freddie Brooks (CFO)
Barclays 020 7623 2323
Bronson Albery / Tom Macdonald / Dion Miceli
Jefferies International 020 7029 8000
Tom Yeadon / Ed Matthews / Rishi Bhuchar
H/Advisors Maitland (Communications Advisor) 07747 113 930 / 020 7379 5151
James Benjamin / Rachel Cohen lxireit-maitland@h-advisors.global
The Company's LEI is: 2138008YZGXOKAXQVI45
NOTES
LXI REIT plc invests in commercial property assets predominantly in the UK,
let, or pre-let, on long (typically 20 to 30 years to expiry or first break),
inflation-linked leases to a wide range of strong tenant covenants across a
diverse range of robust property sectors.
The Company may invest in fixed-price forward funded developments, provided
they are pre-let to an acceptable tenant and full planning permission is in
place. The Company will not undertake any direct development activity nor
assume direct development risk.
The Company is targeting a dividend of 6.6 pence per ordinary share for the
year which commenced on 1 April 2023(3).
The Company, a real estate investment trust ("REIT") incorporated in England
and Wales, is listed on the premium listing segment of the Official List of
the UK Financial Conduct Authority and was admitted to trading on the main
market for listed securities of the London Stock Exchange in February 2017.
The Company is a constituent of the FTSE 250, EPRA/NAREIT, MSCI and STOXX
Europe 600 indices.
COMPANY PRESENTATION FOR INVESTORS AND ANALYSTS
A Company presentation for investors and analysts will take place today,
Wednesday, 7 June 2023, via a live webcast and conference call at 9.30am UK.
To access the live webcast, please register in advance here:
https://brrmedia.news/LXI_FY23 (https://brrmedia.news/LXI_FY23)
The live conference call dial-in is available using the below details:
Dial in numbers UK Toll
Free: 0808 109 0700
UK
& International: +44 (0) 33 0551 0200
Password to quote: LXI REIT Annual Results
Participants can type questions into the webcast question box or ask questions
verbally via the conference call.
The recorded webcast and slides will be available on demand later in the day
on the Company website: www.lxireit.com/results-centre
(http://www.lxireit.com/results-centre)
Annual Report and Accounts
Hard copies of the Annual Report and Accounts will be sent to shareholders,
along with the notice for Annual General Meeting. The Annual Report and
Accounts will also be made available on the Company's website at
www.lxireit.com (http://www.lxireit.com) . In accordance with Listing Rule
9.6.1, copies of these documents will be submitted to the National Storage
Mechanism and will be available for viewing shortly at
https://data.fca.org.uk/#/nsm/nationalstoragemechanism
(https://data.fca.org.uk/#/nsm/nationalstoragemechanism)
Alternative performance measures
The Group uses alternative performance measures including the European Public
Real Estate ("EPRA") Best Practice Recommendations ("BPR") to supplement IFRS
as the Board considers that these measures give users of the Annual Report and
Financial Statements the best understanding of the underlying performance of
the Group's property portfolio.
The EPRA measures are widely recognised and used by public real estate
companies and investors and seek to improve transparency, comparability, and
relevance of published results in the sector.
Reconciliations between EPRA and other alternative performance measures and
the IFRS financial statements can be found in Notes 25 and 26 to the
consolidated financial statements and in the Additional Information of the
Company's Annual Report.
Definitions of alternative performance measures are given in the Key
performance indicators and EPRA performance measures sections or otherwise
included in the Glossary section of the Group's March 2023 Annual Report.
1 The portfolio valuation includes forward funding commitments and
assets held for sale. A reconciliation between portfolio value and investment
property at fair value and IFRS is included in Note 8 to the consolidated
financial statements
2 Pro forma net LTV is stated after adjusting the value of
investment properties (the denominator) for the acquisition price of
properties that have exchanged but not completed and for costs to complete
forward funded assets and net debt (the numerator) for the acquisition price
of properties that have exchanged but not completed plus associated
acquisition costs and for costs to complete forward funded assets
3 These are targets and not profit forecasts
CHAIRMAN'S STATEMENT
Dear shareholder,
This report covers the year to 31 March 2023, and the maiden annual results
for the enlarged Group, following the merger with Secure Income REIT plc ("SIR
plc") (the "Merger"), which completed in July 2022. I welcome the new
shareholders to the Company, and I am very pleased to report to you the
results of the Group.
The merger has created a substantial defensive and resilient portfolio,
providing a strong foundation to deliver secure attractive and growing income
returns and capital protection to our shareholders. The performance of the
Group, in view of the macroeconomic headwinds that we have faced in the
period, is a testament to those qualities. We expect to see capital growth
prospects returning once the property market normalises.
Our assets are well diversified across a broad range of resilient sectors with
high barriers to entry, strong underlying property fundamentals and
demonstrably attractive and sustainable rents. The portfolio is let on very
long-term leases to tenant counterparties that have demonstrated strong
performance throughout the current and previous economic cycles and have in
most cases continued to outperform in the prevailing economic climate.
Despite the fall in portfolio values during the year across the market, the
Company continued to deliver attractive inflation linked income returns
through a growing dividend, up 5% on the previous year, and with the potential
for further growth, with another 5% increase in the dividend target announced
post year end.
Share prices and valuations have been impacted by rising interest rates, but
the cost of our own debt has been secured for the medium-term through our
comprehensive refinancing programme. This, coupled with inflation being widely
forecast to start falling by the end of the calendar year, position the
Company well to benefit from post stabilisation yield compression. As interest
rates reach a terminal level, we believe we will begin to see the increasing
relative attraction of property as an alternative income stream.
Our portfolio remains a highly attractive investment proposition at current
valuation levels. Sustainable rental levels have meant that individually our
operating assets continue to represent highly profitable and attractive
business units which our tenants want to retain. The market looks set for
further consolidation with a large number of sub scale REITs trading at
attractive discounts. The platform we have created puts the Company in a
strong position to capitalise on these opportunities in a competitive market
whilst continuing to provide our shareholders with a stable source of growing
income.
Merger with SIR plc
On 11 May 2022, the Company announced the terms of the proposed Merger. Voting
from respective shareholder groups demonstrated overwhelming support for the
Merger, which completed on 6 July 2022. This year's accounts include eight
full months of the results of the enlarged Group. The Merger has been treated
as an asset acquisition for accounting purposes rather than a business
combination. Further detail of the accounting judgement can be found in Note 2
to the consolidated financial statements.
The Merger has created the UK's leading diversified, long income REIT. The
Group's substantial scale should enable it to benefit further from significant
growth opportunities within our portfolio and in the market. The Company has
already begun to do so, with two key innovative transactions in the year in
the form of the Merlin 'income strip' transaction and the re-gear of our
Travelodge portfolio.
The Group owns a portfolio of 350 properties that are 100% let with an
aggregate valuation of £3.6bn at 31 March 2023, contracted annual rental
income of £202.2m and a very long WAULT to first break of 27 years.
The Company and its shareholders have also begun to benefit from significant
synergies, including material deduplication of management fees and other
overheads for eight months of the period, with the enlarged Group
demonstrating a total expense ratio of 0.9% for the year. (31 March 2022:
1.0%).
Since the Merger, the management team has continued to execute the
complementary investment strategies employed by both LXi and SIR plc. This has
included a focus on long income real estate, diversification, conservative
leverage, and an active portfolio management strategy identifying
opportunities to unlock further value for shareholders.
Debt capital and refinancing
At 31 March 2023 our pro-forma net LTV was 37%. The Board and management team
remain committed to a medium-term LTV target of 30%. The Company was very
pleased to announce its first investment grade rating during the year and we
remain committed to reducing our LTV over the medium term both through active
disposals and value enhancing asset management.
Management has overseen a total of £1.1bn of debt repayment and refinancing
post year end, which has been a significant achievement in the current
climate. In doing so, we have increased the average debt maturity to 6 years
(from 3 years), with a well staggered maturity profile whilst removing
interest rate risk with an average cost of debt of 4.7% pa for the medium term
and thus protecting the Company's long term progressive dividend policy.
Results and dividends
Despite challenging market conditions and volatility in share prices and
property values, the Company has delivered a resilient performance for the
year versus the wider UK REIT market with a total accounting return of (10.7)%
(31 March 2022: 18.2%), on a geared basis, materially outperforming the CBRE
all property total returns of (16.2)% on an ungeared basis.
The outperformance was delivered through the defensive qualities of our
portfolio and creative asset management initiatives that our management team
executed in the year. This demonstrates the attractiveness of both a
well-diversified long-let, index linked portfolio and the scale that allows
opportunities for value growth even in challenging markets.
The Group's net assets increased by 62% to £2,108.1m in total, during the
year, driven predominantly by the share for share element of the Merger. On a
per share basis, the Group's EPRA NTA contracted by 21.5 pence, primarily
driven by:
· yield expansion across the majority of property sectors in
response to wider economic conditions, in particular the rising interest rate
environment,
· offset to some extent by the accretive asset management
initiatives of the Merlin 'income strip' transaction and the Travelodge
re-gear, as well as index-linked rental growth; and
· the costs associated with the Company's merger with SIR plc,
which totalled £35.3m and represented less than 1% of the combined portfolio
value or 2.7 pence per share(1,2)
We are pleased that the total of our quarterly dividends paid and declared in
respect of the year of 6.3p per share, means that we have achieved the stated
target that we set for the financial year, for the sixth consecutive year
since IPO(3,4).
The dividend for the year was fully covered by the Company's adjusted cash
earnings and represents compounded dividend growth of 5% per annum since IPO,
outperforming the consumer price index during that period which has averaged
3.4% per annum and providing inflation protection to our shareholders.
1 Combined independent valuations included in the public merger
documents performed by Knight Frank in respect of LXi REIT plc and CBRE in
respect of Secure Income REIT plc
2 These costs have been recognised as additions to investment
property and expensed through the profit and loss account as a fair value
movement in the period, in accordance with IFRS
3 These are targets and not profit forecasts
4 After the year end the Directors became aware that certain
dividends paid since the Merger had been made otherwise than in accordance
with the Companies Act 2006. A special resolution will be proposed at the
Company's forthcoming AGM to remedy this issue
Environmental, Social and Governance ("ESG")
Embedding ESG considerations into the Company's strategy is synonymous with
safeguarding portfolio value and as such is a key focus for myself and the
wider Board. Our aim is to deliver best-in-class ESG integration into a
long-income property fund, facilitated by the Investment Advisor's on-going
progress in this space under direct supervision of the Board.
The Board is delighted that Barbora Melezinkova has joined the Investment
Adviser's team as Head of ESG. Barbora is responsible for helping to deliver
on the ESG strategies. The Board has already implemented an ESG Working Group
which Ismat and I both sit on as Board members.
Some of our ESG highlights during the year have been, obtaining our first
GRESB rating on the portfolio in September 2022, also in September we obtained
our first EPRA sBPR rating. We have also instructed decarbonisation reports on
a tranche of our assets as well as moving all energy provision in
landlord-controlled areas to suppliers that provide green tariffs. See the ESG
Report for more on this and our ESG strategy.
This commitment to ESG reflects our wider commitment to good stewardship while
also giving rise a wealth of opportunities for value-add asset management
initiatives as our tenants pledge to transition to fully environmentally
sustainable businesses and to deliver value to society beyond purely financial
returns.
Board changes
Following the Merger, the Board was delighted to welcome Nick Leslau and Sandy
Gumm to the Board as Non-Executive Directors. They bring invaluable expertise
and experience to the Board as well as intricate knowledge of the assets and
debt portfolio of SIR plc.
On behalf of the Board and management team, I would like to express my deep
thanks to Jan Etherden and Patty Dimond, both of whom stepped down as
Directors, for their contributions to the growth and success of the Company
since its IPO and for the strong legacy they leave.
The Board changes have also enhanced the Company's Board succession planning
with a more staggered range of tenure among the Board. We have undertaken a
detailed Board review in the year and look to implement its findings. I very
much look forward to continuing to work closely with the Board to help steward
the business to further success and outperformance for our shareholders.
Outlook
The successful merger has created a platform from which we will be able to
grow the Group even further, leveraging our scale, experienced management team
and low cost base.
We see exciting opportunities in the market in the form of:
· a significant pipeline of assets through permanent structural
change within open-ended funds that have traditionally held vast prime long
income portfolios,
· a cliff edge of refinancing events for corporates as their
historic, low-cost bonds mature that we expect will create a source of new,
long income stock through sale and leasebacks,
· the significant opportunity for consolidation and M&A in the
long income market, due to share price discounts and a range of sub-scale
platforms that fail to provide desired liquidity and downside protection. The
scale and diversified nature of our portfolio and investment strategy and the
demonstrated expertise and skills of our management team put the Company in a
strong position to capitalise on these opportunities, and
· value opportunities in our existing portfolio through lease
re-gears, strengthening relationships with our key tenants and other asset
management initiatives.
With forecasts for inflation stabilising and interest rates reaching terminal
level, we believe the property market repricing will begin to reverse in the
second half of the calendar year. Property values appear to have stabilised
since the year end and properties with defensive qualities tend to be those
that rebound the quickest, particularly in tougher economic climates where
capital chases secure investments.
The Group continues to deliver progressive dividend growth supported by our
index-linked rents and largely fixed debt costs as well as accretive asset
management and is targeting a fully covered dividend of 6.6p for the year to
31 March 2024, representing an increase of 5% on the prior year.
I thank both the Board and the management team for their continued work in the
year. Going forward we remain focused on managing both the risks and
opportunities that our portfolio presents. We remain highly confident in our
ability to successfully capitalise on the growth opportunities that we
continue to identify and on continuing to provide a secure and growing income
return to our investors. This will enable us to continue to enhance and unlock
sustainable value in our defensive, resilient portfolio for all of our
stakeholders.
Cyrus Ardalan
Chairman
6 June 2023
INVESTMENT ADVISOR'S REPORT
Certain statistics and KPIs are alternative performance measures for which
definitions are given in the Key Performance Indicators and EPRA performance
measures sections or otherwise as included in the Glossary.
Portfolio overview
The Group's portfolio comprises 350 fully let and well diversified long-income
properties across 13 sub-sectors with multiple underlying uses. The assets are
let on very long leases averaging 27 years to first break, to over 80 separate
tenant operators on low and sustainable rents. All leases are granted on full
repairing and insuring terms, protecting the Group from property cost leakage
and capex requirements.
The Group's lease arrangements provide contracted annual rent of £202.2m. The
lease rent review provisions provide inflation protection with 98% of the
reviews by rental value either containing index linked or fixed rental
uplifts. Rents are reviewed on an annual (56%) or five-yearly (44%) cycle.
The expectation of poor economic growth, generationally high levels of
inflation and consequent interest rate rises across global economies, have
significantly impacted property values in the UK. Long income property value
has traditionally correlated more closely with GDP growth rather than interest
rates. A significant increase in property investment as an alternative income
asset class due to the attractive spread to gilts and other debt and equity
investments, has meant that as that gap has tightened and even reversed
through interest rate hikes, even inflation linked long lease properties have
seen a dramatic yield shift.
The Company's defensive characteristics, with very long and indexed leases,
broad diversification and a proactive management style has provided partial
protection. The portfolio was independently valued at £3,356.3m (31 March
2022: £1,544.4m) with contracted rental income of £202.2m per annum,
reflecting a like for like change of (9.6)% for the 12 month period. The
movement reflects an outward yield shift of 90 bps to 5.4% at 31 March 2023
(31 March 2022: 4.5%), offset by 2.3% like for like rental growth.
The Company's total return for the 12 months ending 31 March 2023 of (10.7)%,
on a geared basis, is ahead of the CBRE All Property Benchmark of (16.2)%, on
an ungeared basis, for the same period. This is particularly pleasing given
the lower risk attributes the portfolio compared to the all property
benchmark.
Our strategy remains to invest in assets that are mission critical to our
tenants' operations in defensive sectors with a stable outlook and high
barriers to entry. The merger with Secure Income REIT has enhanced both the
defensive characteristics of the portfolio and its income security. It has
provided accretive asset management opportunities, some of which have already
come to fruition and are detailed below. Additionally, selective disposals
have and will continue to provide the ability to reduce sector and tenant
concentration, repay debt and reduce leverage and to redeploy capital
opportunistically.
Sector exposures
The portfolio is well diversified across a broad range of resilient
sub-sectors with high barriers to entry, strong underlying property
fundamentals, and low starting rents. The assets are let on long-term leases
to tenant counterparties which have demonstrated strong performance throughout
previous economic cycles.
This multi-sector strategy both provides downside protection and offers a
broad universe of assets in which to deploy capital. The strategy gives
investors a diverse and flexible portfolio where exposures can be increased or
reduced as appropriate to address external factors such as changing consumer
behaviour, enabling the company to pivot towards sectors where we anticipate
the best returns for our shareholders over both the short and the longer-term.
The Group's sector weightings including asset acquisitions for which contracts
have exchanged but have not yet completed, are as follows:
Healthcare - 22% (31 March 2022: 8%)
Following the merger with Secure Income REIT, Healthcare has become the
Company's largest sector by capital value. It is a sector that has
demonstrated resilient performance with robust occupancy rates and significant
capital inflows over a long period of time. In the period it has outperformed
the CBRE All Property Benchmark of (16.2)% compared to (6.2)%.
The sector tends to be characterised by long inflation linked leases giving
occupiers the security they need to invest in this capital-intensive sector
and indexation allowing business to plan effectively. The expectations of the
end user are high and occupiers require property that enables them to continue
to thrive in this competitive market.
Due to the supply/demand imbalance in UK hospitals and other healthcare
properties, in general healthcare valuations have not been affected by
cyclical economic trends. Limited quality stock, high barriers to entry and an
aging demographic that is living longer are underpinning demand and driving
increased capital allocation to the sector. We are currently seeing continued
unsolicited interest in the healthcare portfolio despite challenging
macroeconomic conditions. This lack of correlation with other real estate
sectors provides the Company with enhanced risk mitigation through
diversification.
Ramsay Health Care (Ramsay) is the Company's major tenant within the sector
with 18% of the total portfolio rental income. Ramsay operates a global
network of clinical practice, teaching and research facilities. They operate
across ten countries, with over 11 million admissions and patient visits to
facilities in more than 530 locations. Within the UK, Ramsay operate 34 acute
hospitals of which 11 are in this portfolio. Ramsay recently acquired Elysium
Healthcare, a leading independent operator of 76 long-term medium and low
secure hospitals and complex care homes for individuals with mental health
conditions. Ramsay demonstrated strong results for H1 2023 with a positive
outlook. We note the rise in demand for the private pay market and the ongoing
propensity for the NHS to work with independent providers and we expect these
trends to continue. This is particularly the case in the provision of mental
health services where demand has increased dramatically in recent years; a
situation that has been exacerbated by Covid lockdowns and an area we expect
Ramsay to significantly benefit from following the integration of the Elysium
business.
Ramsay is well positioned to continue to take advantage of the large increase
in self-pay demand driven by increased NHS waiting lists as well as
benefitting from increased NHS contracts as the Government seeks to reduce
waiting list for non-emergency operations. Through the structure of the lease,
we have guarantees from the ultimate, listed parent company meaning we have
the benefit from the strength of their global operations. The Ramsay Group
also benefits from an investment grade rating.
Looking forward, this is a sector where we continue to see strong growth
prospects. Investment pricing has stabilised and recovered rapidly following
the disruption of the mini budget last year and we anticipate the appetite
from both occupiers and investors to continue in this sector.
Hotels - 21% (31 March 2022: 13%)
This sector has provided robust performance despite wider economic challenges.
This was, in part, due to our proactive management approach securing an
accretive rent smoothing and lease extension agreement with our largest hotel
tenant Travelodge. Golden Tree is now the sole owner of Travelodge, which is
also a positive step and we will continue to work closely with them.
The budget hotel sector is experiencing a boom, with both of the Company's
tenants reporting record numbers as more and more customers turn to a trade
down alternative and following the easing of the pandemic lockdown
restrictions in the UK with both major operators, Travelodge and Premier Inn,
surpassing pre pandemic performance. Travelodge reported record profits for
their financial year ended 31 December 2022 from previous 2019 highs. Likewise
Premier Inn reported H1 2023 revenues (26 weeks to September 2022) up 25% on
the equivalent FY2020 period. Both operators are benefitting from strong
demand from both business and leisure customers as the staycation trend
continues and business travel recovers. The budget sector looks well placed to
continue this outperformance as more travellers trade down amid the continued
cost-of-living backdrop. Both operators are continuing with a sustained
programme of investment in their portfolios which is further supporting market
outperformance.
Our assets delivered like for like performance of (1.1)% over the year making
it our second best performing sector. Investment market demand has remained
despite the wider challenges in the economy, with end user demand strong and
the best hotels in strong locations let to the covenants trading well.
Theme Parks - 19% (31 March 2022: -%)
This is a new sector for LXI that was acquired as a result of the merger with
Secure Income REIT. It gives the Group exposure to a diverse, uncorrelated sub
sector, secured against the dominant operator in the UK, Merlin
Entertainments. Merlin operates all the major attractions in the UK including
our assets Alton Towers, Thorpe Park and Warwick Castle. They are the only
operator of UK attractions to feature in the Aecom's Top 20 attended
attractions for EMEA in 2021.
Merlin is Europe's largest, and the world's second largest, visitor attraction
operator with 142 attractions in 25 countries. This sub sector of UK leisure
and hospitality has proven to be non-cyclical and benefits from a level of
discretionary spend consumers are not willing to forgo. Merlin reported
trading at its resort theme parks business in 2021 was ahead of pre-pandemic
2019 levels and that year to date 2022 was ahead of budget at the end of Q3
2022. Through the structuring of the lease, we have guarantees from the
ultimate parent company, meaning we have the benefit from the strength of
their extensive global operations.
Merlin continues to invest heavily in its estate. Enabling works have begun at
Thorpe Park for a new rollercoaster due to open in 2024 with a capital
investment from Merlin of c£20m. The Company works closely with Merlin to
realise opportunities within the estate and have agreed to fund the
development of a new 60-bedroom hotel at Warwick Castle, set to open in
January 2024.
Given the significant barriers to entry for any new theme parks in the UK, and
the very long inflation linked income with over 54 years to expiry, the
Company sees this sector as providing a key source of long term, defensive and
diversified income.
Foodstores and Essentials - 10% (31 March 2022: 25%)
The yield compression that has been seen over the previous few years in this
sector has partially been reversed in the year. Yield expansion has been
driven by both significantly reduced investment activity by domestic single
sector REITs and US REITs who had bid down prices significantly in the past
five years along with the economic impact of interest rate increases.
However, foodstores remain an important sector for the portfolio and
underlying occupational demand remains strong. It is a sub-sector that forms
part of the structure of the economy with significant non-discretionary spend.
Our assets have been carefully selected at the point of purchase, are well
located, rack rented or reversionary and have long inflation linked leases.
They are let to a variety of well established occupiers and we anticipate they
will continue to perform well in the medium term as capital markets stabilise.
We continue to see value in asset purchases in this sector by working with
major operators on sale and leaseback opportunities and from open ended funds
disposing of standing investments to meet their redemption requirements.
Industrial - 7% (31 March 2022: 18%)
Despite the continued strength of occupier demand there has also been notable
yield expansion in this sector during the period. The Company's assets have
performed comparatively well and have significantly outperformed the CBRE
Industrial Benchmark (27.7)%.
The Group's industrial assets are generally underpinned by their strategic,
often business-critical, importance to the occupiers. They are let on long
inflation linked leased to a range of strong covenants and, in many cases,
rents are reversionary. Generally, rent reviews are subject to 3-4% pa,
securing inflationary linked growth in the long run, whilst ensuring that
rents remain affordable for occupiers. At purchase we target asset where
vacant possession value is close to, or sometimes in excess of, the price.
Looking forward, it is anticipated that occupier demand will remain resilient,
and that industrial property development will continue to be constrained by
substantial rises in building costs making new schemes less profitable for
developers and potentially unviable.
It is anticipated there will be some yield compression in the medium term in
line with the recovery of the capital markets and the Group's industrial
assets will be well positioned to benefit from this recovery.
Other - 21% (31 March 2022: 36%)
There is a wide variety of assets held by the Company, making the strategy
truly diversified and giving investors exposure to a broad range of different
assets and tenants. The largest sectors detailed above constitute 79% of the
Company's total holdings. The remaining 21% includes leisure, public houses,
Manchester Arena, Car Parks, Garden Centres, Life Sciences, Drive-thru coffee
pods and Education. See property portfolio section for breakdown.
Acquisitions and disposals
In addition to the properties that the Company acquired through the merger
with Secure Income REIT, it has separately acquired five new properties during
the year totalling £89.1m:
· A foodstore let to Asda in Halesowen on a lease with 21 years
remaining. The lease benefits from fixed rental increases of 3%pa on a 5
yearly basis.
· A garden centre let to Dobbies in Reading on a 35 year lease with
annual reviews to CPI+1% capped at 4% with a collar of 1.5%.
· A forward funding of a drive thru coffee pod pre-let to Costa on
15 year lease with 5 yearly reviews to RPI subject to annual Cap of 4% and
collar of 1%.
· A forward funding of a Nursery in Addlestone, Surrey, pre-let to
Busy Bees on a 25 year lease with 5 yearly CPI reviews annually capped at 4%
and a collar of 1%.
· The forward funding of two foodstores in Houghton Le Spring
pre-let to Tesco on a 20 year lease and Home Bargains on a 15 year lease. The
Tesco lease benefits from 5 yearly reviews to CPI capped at 2.5%pa.
The Company disposed of the following assets totalling £29.5m:
· Two car showrooms let to Cazoo in Northampton and Chertsey.
· A hotel let to Premier Inn and adjoining retail park in Saffron
Walden.
Significant asset management transactions
Merlin income strip
As the first part of re-financing, the Company used an innovative ground lease
structure to release capital. This involved the sale of a 65-year income strip
in Alton Towers and Thorpe Park in October 2022 for £257m. The sale price
represented a net initial yield of 2.96% NIY on 30% of the annual rental
income. The structure comprised selling the freehold in the properties to a UK
institutional investor, with 999-year leases granted back to the Company
pursuant to which the Company pays an annual aggregate rent of £8.2m,
representing 30% of the annual rental income received from the tenant. The
Company can acquire the freehold back for £1 in year 65.
This has been a performance accretive way of diluting the Company's exposure
to one of its largest tenants, thereby improving diversification at portfolio
level and providing capital at a very cost effective rate compared to
traditional bank debt.
Travelodge lease re-gear
In December 2022, the Company exchanged contracts with Travelodge Hotels
Limited on an accretive lease regear across 122 hotels. In return for
converting the 5-yearly uncapped RPI reviews to 5-yearly CPI+0.5% compounded
with caps at 4% and collars at 1%, the Company has extended the unexpired
lease terms by a weighted average of nine years. This resulted in the weighted
average unexpired lease term to first break on the 122 hotels increasing from
19.5 years to 28.5 years. No rent-free period was granted. The Company and
Travelodge also agreed a "rent smoothing" across the 122 hotels so that
individual rent levels were reset to best reflect the trading performance of
each site the total rent roll remains the same. At the period end not all of
these leases had completed as some superior landlord approvals are pending.
This is simply a timing issue as consent cannot be withheld unreasonably.
The Company took the opportunity to agree "green lease" provisions to
modernise the leases including to effect the following principles: (i) sharing
of energy, water, recycling and waste data; (ii) co-operating on the
environmental, social and governance strategies of the landlord and tenant;
and (iii) future proofing the leases to ensure the landlord has the necessary
rights to enter the properties to make environmental performance improvements.
Rent collection
The Company's operational performance has remained robust throughout the year
with 100% of rent due having been collected. The Investment Advisor works
closely with both tenants and property managers to ensure timely payment of
rent. The portfolio has 100% occupancy and 98% of rent reviews are inflation
linked or subject to fixed uplifts. This further assists with the tenant
relationships, removing the requirement for protracted rent review
negotiations and enables businesses to plan which in turn encourages prompt
rent payment.
Inflation and rent reviews
Due to various geopolitical and macroeconomic factors we have seen a year of
high inflation. CPI annual growth averaged 10.1% and RPI annual growth
averaged 13.5% for the year to March 2023. The Group's 122 contracted rental
uplifts in the period were broadly capped or fixed and delivered average
growth of 3.6% pa, resulting in like for like rental growth of 2.3%.
The Group's portfolio income is 98% index-linked or contains fixed rental
uplifts, which breaks down between RPI 26%, CPI 38% and fixed 34%. The Group's
fixed uplifts average 2.7% pa. Of the Group's portfolio, 56% of the rents are
subject to collared uplifts, which average 1.2% pa and 60% are subject to
capped uplifts, which average 3.9% pa. We therefore expect the Group to
capture the vast majority of inflation over the medium-term, but the Group is
also well protected against lower inflationary periods.
The portfolio's rent reviews are either on annual (56%) or five-yearly (44%)
cycles, and over the following five year period the Group expects the
following percentage of rental income to review in each financial year:
Year ending 31 March Annual Five-yearly Total
2024 56% 5% 61%
2025 56% 5% 61%
2026 56% 11% 67%
2027 56% 10% 66%
2028 56% 9% 65%
Linking rental growth in the Group's portfolio to indexation seeks to provide
investors with inflation-protection, whilst also capitalising on the
traditional faster pace of inflation beyond commercial real estate open market
rents in the UK.
The possibility for continued higher inflation represents an opportunity for
the Company to generate superior income driven returns for investors, given
the inflation linkage in the Group's portfolio rent reviews and the long-term
lease arrangements. That said, without the mitigation factors that the company
has in place, levels of inflation that are currently being experienced in the
UK could, over the longer-term, cause rents in the portfolio to grow to the
point where they materially exceed equivalent market rental values, as well as
potentially resulting in unsustainable rental growth for tenants or in
properties made less attractive to alternative operators due to profit
erosion.
The portfolio is protected from this risk in a number of ways, including:
(i) capped and fixed rental uplifts giving the tenant (and the Group)
certainty of rental growth profile,
(ii) regularly entering into new leases at very low rents through forward
fundings and sale and leasebacks that provide a higher level of rent cover and
are therefore better able to withstand rental growth,
(iii) recycling of capital into new assets to refresh the portfolio and
maintain a low spread to market rents, and
(iv) focussing on well capitalised tenants with a high proportion of freehold
ownership and lower exposure to rents that are better able to ride out such
inflationary periods.
Financial results
Total accounting return
31 March 31 March
2023 2022
Total accounting return (10.7)% 18.2%
The Group's total accounting return comprises income, through dividends paid
to shareholders, and capital returns, through changes in EPRA NTA during the
year. A summary of the dividends paid and EPRA NTA movement is given below.
EPRA NTA
31 March 31 March
2023 2022
EPRA NTA per share (ex-dividend) 121.1p 142.6p
During the year, the EPRA NTA contracted 15.1%, broadly reflecting the outward
shift in valuations during the year, compounded slightly by the Group's
leverage.
Dividend per share
31 March 31 March
2023 2022
Dividend per share 6.30p 6.0p
In respect of the year, the Company has proposed dividends totalling 6.30p per
share. The dividend per share reflects an increase of 5% on the previous
half-year.
Total expense ratio
31 March 31 March
2023 2022
Total expense ratio (annualised) 0.9% 1.0%
Following the successful merger with Secure Income REIT plc, a new lower
investment advisory fee tier was introduced, and incremental management fees
are now charged at a modest 55 bps (on market capitalisation above £2bn). The
reported TER includes only eight months of the enlarged Group post-merger and
we expect the efficiencies of scale achieved to be demonstrated through
further reductions in the total expense ratio in the years ahead.
Loan to value
31 March 31 March
2023 2022
Pro forma net LTV 37% 22%
In the medium-term, in line with our conservative leverage policy, our LTV is
expected to be maintained at approximately 30% which we expect to achieve
through a combination of active and selective disposals and through the
general recovery of the property sector. Current pro forma net LTV is well
within the Group's borrowing policy cap of 40% and the Company maintains
significant headroom to all banking covenants.
Financing
The Group's debt pool is secured against the majority of the Group's
investment properties and comprises the facilities listed below.
A summary of the facilities as at the year end, then subsequent to our post
year end refinancing are below:
Position as at 31 March 2023
Facility Lender Principal Maximum cost Maturity
Term loan Scottish Widows £55.0m 2.74% Dec 2033
Term loan Scottish Widows £40.0m 2.74% Dec 2033
Term loan Scottish Widows £75.0m 2.99% Dec 2033
New facilities in the year
Leisure facility HSBC(1) £60.0m 3.20% Jun 2023
Acquisition facility (1,3) Barclays and HSBC £385.0m 4.81%(1) May 2024(2)
Merlin B Facility(1,2,3) Blackstone £53.0m(3) 4.95% Mar 2026(2)
Budget hotels 1(1,3) M&G £59.0m 2.71% Oct 2023
Budget hotels 2(1,3) M&G £65.4m 3.35% Apr 2023
RCF(3) Lloyds Bank and RBSi £102.0m 2.95% Aug 2024
Healthcare 1(1) L&G £63.1m 4.29% Sep 2025
Healthcare 2(1) AIG £292.5m 5.30% Oct 2025
£1,250.0m
Facilities repaid during the year
Merlin A facility Blackstone £232.0m 4.95% Mar 2025
Position after post year end refinancing
Facility Lender Principal Maximum cost Maturity
Term loan Scottish Widows £55.0m 2.74% Dec 2033
Term loan Scottish Widows £40.0m 2.74% Dec 2033
Term loan Scottish Widows £75.0m 2.99% Dec 2033
Leisure facility HSBC(1) £60.0m 4.55% Dec 2024
Healthcare 1(1) L&G £63.1m 4.29% Sep 2025
Healthcare 2(1) AIG £292.5m 5.30% Oct 2025
New facilities post year end
Long-term loan Canada Life £148.0m 5.75% March 2039
Syndicate loan A Lloyds, Barclays, £115.0m 4.15% Jan-2028
Santander and
RBS International
Syndicate loan B £250.0m 4.15% Jan-2026
Syndicate RCF £200.0m 5.87% Jan-2028
£1,298.62m 4.71% 6 years
1. Facilities were also new during the year as they arose as a result
of funding the acquisition of SIR or were existing SIR loans which LXi took
on.
2. Loan principal was in Euros hedging the NAV and income exposure to
Euro through the German asset. Translated to GBP at a rate of 0.88 to the EUR.
3. Facilities repaid post year end.
We have continued to take a proactive and resourceful approach to our
refinancing, looking at alternative sources of financing rather than just
vanilla bank debt. In September, we announced an income strip on the Group's
Thorpe Park and Alton Towers assets. The 65 year income strip represented 30%
of the annual rental income received from these assets to a UK institution for
£257m, reflecting an attractive net initial yield of 2.96%.
There were two key material benefits behind this income strip, firstly it was
instantly earnings accretive as the proceeds were used to pay down debt the
Merlin A facility, which had a cost of 4.95% p.a. Secondly, the impact of the
unwind on the associated hedging on the debt which was paid off raising £24m.
This funded the cost of the new hedging we put in place for the second stage
of our refinancing.
The next stage of our refinancing on 6 March 2023 was the completion of an
extension of an existing £60m HSBC loan and the agreement of a new £148m
16-year term loan with an institutional lender.
We then completed our refinancing exercise in April 2023 with a new, £565m
secured, interest-only debt facility with a syndicate of major clearing banks
comprising a number of the Company's existing lenders.
We believe the fact that we have managed to refinance such a large volume of
debt at attractive rates in a challenging economic climate demonstrates the
quality of our assets and the robustness of our tenants.
The Group manages interest rate risk by either fixing (by way of fixed rate
facilities or swapping floating rates) or capping rates. Fixing the rate of
interest on these facilities gives the Group long-term certainty over its
ability to generate significant growth in the generation of free cash flows as
a result of largely collared index-linked and fixed rental uplifts, and the
positive effects of conservatively structured leverage. The Group monitors the
headroom on ICR covenants regularly and at present reports significant
headroom on all facilities.
The balance sheet is well positioned with pro forma net LTV of 37%. As
referred to above, our tightest covenant across the Group's secured facilities
would require a 30% reduction in value to breach and the Group has significant
unsecured assets and cash to use if required before any remedial action is
taken.
The LTV is within our agreed range but above our longer-term target. If yields
remain flat then this would result in a material positive movement of the LTV
to 35.5% in FY24 and 33.8% in FY25. We remain committed to a conservative
medium-term LTV target of 30% and will continue to actively manage down our
LTV through disposals and value enhancing asset management initiatives. The
Investment Advisor continues to receive significant unsolicited interest in
the Company's high quality portfolio both for disposals and 'income strip'
opportunities and expects to continue to selectively sell assets where capital
could be better allocated to enhance shareholder returns.
Management resource
We are pleased to report the recent senior appointments of Alex Short and Alex
MacEachin, as part of our continuing investment in resource and following the
successful merger and integration with Secure Income REIT. Alex Short,
appointed as Chief Investment Officer, has over 20 years' industry experience,
having held senior roles at leading real estate businesses, including AEW and
UBS. Alex MacEachin, appointed Finance Director, has extensive experience of
property and construction finance and accounting matters, including most
recently as Group Financial Controller of Empiric Student Property PLC.
Rob Ward as Head of Real Estate is a qualified Chartered Surveyor with more
than 15 years' experience in commercial property. Most recently at Prestbury,
helping to launch and manage Secure Income REIT through to its merger with LXi
in 2022. Stacey Wood has been appointed as Financial Controller. Stacey is a
Certified Chartered Accountant (ACCA) with more than 12 years direct
experience in the commercial property sector, most recently at Prestbury,
helping to manage Secure Income REIT from the time of its listing through to
its merger with LXi in 2022.
During the year we also appointed, Alissandra Cooke as General Counsel.
Previously Alissandra practised as a solicitor for 9 years at City law firm,
Travers Smith LLP. She has significant experience advising cross-sector
property funds, developers and operators on a broad spectrum of real estate
matters. Barbora Melezínková was appointed Head of ESG. Previously, Barbora
was a Senior Asset Manager on LGIM Real Assets' long income funds with
dedicated focus on ESG strategy and implementation. Barbora is a qualified
Chartered Surveyor with over 12 years of experience.
Outlook
The successful merger has created a platform from which we aim to grow the
Group even further, leveraging our scale, experienced management team,
liquidity and low cost base.
We see a number of opportunities such as assets coming out of open-ended funds
due to redemptions, a number of corporate bonds are coming to maturity meaning
they will need to find alternative sources of funding such as sale and
leasebacks. The most significant opportunity we see is further M&A
activity in the REIT market. There are a large number of mid-market generalist
REITs which do not have the same access to capital, liquidity and low cost
base which LXI does. We believe we have shown the material tangible benefits
of which a merger can achieve with the SIR plc.
The Government and Bank of England believe they have more certainty over
inflation over the near term, with inflation expected to return to more normal
levels by the end of the year.
The impact of inflation for the Group's rental income is positive, given the
portfolio's rent review linkage to UK inflation (26% RPI, 38% CPI). We are,
however, cognisant of the potential impact that current levels of inflation
could have on the wider economy. This may also be an impact on the prospects
of our tenant operators but they can be managed by the rent review caps to the
mutual benefit of the Company and its tenants.
The interest rate rises used to combat inflation have meant that property
values in the UK have been impacted as was shown in the Groups valuation yield
shifting to 5.4%. There are signs that the bottom of this value cycle has been
met with the CBRE monthly index shows a rise (0.6%) in capital values for
first time since the repricing last year.
The Group has continued its progressive dividend growth, we have announced a
dividend of 6.6p for the year to 31 March 2024, this is an increase of 5% on
the year before and we expect it to be fully covered by our cash adjusted
earnings.
Our focus remains to;
· protect and enhance shareholder value through accretive recycling
of capital, asset management initiatives and maintaining a very long WAULT and
diversification
· reduce leverage through selective disposals, active asset
management and capital recycling, to improve balance sheet strength and
protect progressive income returns
· continue to build a business which has the ability to grow using
innovative strategies to provide market leading returns to our shareholders
For and on behalf of the Investment Advisor
Simon
Lee
Frederick Brooks
Director
Director
LXi REIT
Advisors
LXi REIT Advisors
6 June 2023
6 June
2023
ENVIRONMENTAL, SOCIAL AND GOVERNANCE
Statement
As a result of the UK's legally binding commitment to reach Net Zero by 2050,
the property investment industry is now at the point of universally
recognising the need for deep integration of environmental sustainability
considerations into the strategy of any successful property portfolio.
Real estate investors have been linking buildings' wellbeing credentials and
wider social value creation to successful financial performance for quite some
time now, and there is plenty of evidence that companies with strong
diversity, equity and inclusion ethos and emphasis on employee wellbeing
report stronger business performance.
As a result of appreciating these relationships between responsible investment
practices and value creation and preservation, the Board of Directors and the
Investment Advisor recognise our responsibility to manage risk and add value
through the integration of ESG considerations into all areas of the business.
This report has been prepared in accordance with the EPRA Sustainability Best
Practice (sBPR) recommendations on Sustainability Reporting. The report
outlines progress made against previously set targets and introduces new goals
for the future as our strategy continues to evolve.
This report contains the following information:
· ESG goals and focus areas
· Year in review: key highlights and progress
· Disclosures in line with the Task Force on Climate-related
Financial Disclosures (TCFD)
· Carbon Emissions and Energy Performance Certification
· Social and Community Engagement
· Governance
· EPRA Sustainability Performance Measures and the Global Reporting
Initiative
ESG goals and focus areas
As ESG continues to rise in prominence in line with our stakeholders' demand
for sustainable investments and with the UK's on-going focus on
decarbonisation and social outcomes, we have continued to build on our
successful work to date by articulating a comprehensive ESG strategy for the
fund with a specific pathway to delivery and a set of measurable KPIs to help
us monitor progress.
Our approach reflects the unique nature of our leases, and our occupiers'
long-term commitments to the sites in our portfolio. With weighted average
unexpired lease term at 27 years, a large proportion of current occupiers will
still be in our buildings by 2050 and many will want to extend beyond this
point given the strategic importance of the sites to their businesses. They
are fully committed to on-going upkeep of the properties through the FRI
leases and the vast majority have their own commitments to reduce own Scope 1
and Scope 2 emissions, which include building energy usage, to Net Zero levels
ahead of 2050. The Company's operational Scope 1 & 2 emissions make up
approximately 0.2% of the total, with the remainder generated by tenants. Our
strategic goals and the plan for their delivery is therefore centred around
supporting occupiers with the delivery of their own decarbonisation plans,
including the financing of any larger capex projects in ways that generate
additional income for the Company. Net Zero Carbon: Principles of energy
hierarchy, as defined by the Better Buildings Partnership, have been followed
in developing our net zero carbon pathways, to ensure effort is focused first
on reducing energy demand and improving energy efficiency before looking to
renewable energy sources and offsets.
The LXi REIT ESG Strategy and Net Zero Pathway document can be found on our
website and additional detail on key goals and metrics is covered later in
this section of the report.
The merger with Secure Income REIT Plc in July 2022 resulted in a change to
portfolio profile, bringing with it a new range of operational real estate,
new tenants and a new set of risks and opportunities from an ESG perspective.
There is now increased opportunity to add value through improving buildings'
environmental performance in collaboration with our occupiers, as much of the
building stock coming in from the Secure Income REIT is older in nature.
Our new top three largest occupiers, accounting for 55% of contractual rent
roll, each have ambitious decarbonisation targets and have been extremely
responsive to collaborating with us on decarbonisation plans for their sites
within our portfolio. The same is true for the remainder of the top 20 and
many of the smaller organisations making up the rest of the occupier base.
A high-level summary of delivery against previously set goals, alongside a
refreshed set of forward-looking objectives in line with our ESG strategy is
as follows:
Short-term initiatives (12-18 months from March 2021) Longer-term goals (three plus years from March 2021):
Obtain first GRESB rating on the portfolio (September 2022) Completed To continue to integrate climate-related matters into the Company's investment Ongoing
process
To develop a road map to deliver a science-based carbon neutral target for the
Obtain first EPRA sBPR rating (September 2022)
business
Instruct decarbonisation reports on a further, pre-established tranche of
To provide investors and our wider stakeholder group with relevant and
assets (March 2023) comparable disclosure relating to ESG matters
Completed
Move all energy provision in landlord-controlled areas to suppliers that To achieve EPC ratings on all assets which of A or B by 2030 as they come up
provide green tariffs (September 2022)
for reletting.
Completed
Recruit for the role of Head of ESG
Stringent ESG due diligence across all new purchases, including requirements
for green provisions in leases
Ongoing
Improve tenant engagement in providing emissions data to improve on our Scope Completed
3 emissions reporting (March 2023)
Completed
Ongoing
Completed
Completed
Ongoing (coverage doubled for 2022 vs 2021)
Strategic goals to 2025: Supporting occupiers' development of specific Strategic goals to 2030 and beyond: Delivery of decarbonisation initiatives in
asset-level environmental and social strategies collaboration with occupiers
Portfolio Scope 3 emissions (tenant energy consumption) coverage by floor Delivery of decarbonisation initiatives in collaboration with occupiers
area: 2023: 75% | 2024: 85%+
Portfolio has the potential to achieve a 30% CO2 emission reduction by 2030
Asset-level decarbonisation audits roll-out: 2023: 15% to have reduction plans off a 2022 indicative baseline
in place by year end | 2024: 30% | 2025: >50%
Portfolio targeting operational Net Zero no later than 2050, in line with the
Social value focus: Complete scope assessment in 2023 UK's legally binding target and reflective of the long-leased nature of our
assets
Biodiversity enhancement: Pilot and roll-out plan in 2023
Year in review: key ESG highlights and progress
We have made significant headway this year in consolidating our strategy,
including setting the ultimate operational Net Zero target of no later than
2050, developing a clear set of KPIs to monitor implementation, enhancing our
disclosures and making a start on forming approaches to biodiversity
enhancement and social value creation.
Investment strategy
· Building on the materiality assessment completed in 2021, we have
developed a comprehensive ESG strategy, incorporating a pathway to a Net Zero
portfolio in operation no later than 2050.
· Standard investment acquisition due diligence ESG requirements
have been enhanced beyond EPC ratings, construction certification and Net Zero
audits, to include forward looking climate risk assessment, green clauses in
leases and a number of social impact and wellbeing criteria.
Sustainability Reporting
· During the year, the Group's investment manager has moved its
sustainability reporting function in-house, establishing full ownership and
detailed understanding of all of the Group's portfolio and corporate emissions
and energy intensity data under a well qualified individual with extensive
experience in both surveying and ESG. We have developed a detailed Company ESG
Dashboard monitoring over 30 individual ESG metrics covering data at the
individual property-level, as well as monitoring our occupier engagement
activity.
· We continue to report in alignment with all 11 recommendations of
the TCFD and strive to gradually enhance our approach to scenario analysis.
TCFD training is now also a standard requirement for any staff of the
Investment Advisor directly or indirectly involved with climate-related
reporting.
Tenant engagement / asset management initiatives
· As a result of a focused campaign to engage with senior managers
responsible for property, ESG and energy management within our largest
occupier organisations, we now have direct ESG dialogue with 19 of our top 20
tenants. Occupier energy consumption coverage for the portfolio doubled to 62%
for the 2022 calendar year resulting from a wider engagement effort on data
sharing.
· The next stage of engagement involves identifying where the
Company as landlord can add the most value in supporting occupiers with their
ESG journey through for example assisting with site-level Net Zero audits,
teaming up on social impact initiatives or deploying further return generating
investment into existing sites.
· We are progressing the roll-out of solar PV installation across
four sites totalling 3 MW of capacity, and are in conversation with occupiers
across seven further sites about PPA opportunities.
· Installation of EV charging points is currently being progressed
across five sites in the portfolio.
Portfolio improvements
· Following the merger with Secure Income REIT, a detailed EPC
audit identifying assets requiring EPC assessments and renewals has been
carried out and we are progressing towards having the portfolio fully rated as
soon as possible. Of the total 160 SIR properties, 144 (90%) now have a rating
and we are working towards having the remaining 16 assessed as soon as
possible.
· We are working with a panel of major UK Net Zero consultants to
create a streamlined Net Zero audit format suitable for long FRI-leased
properties which will cover both a pathway to NZ in operation and EPC
improvement recommendations while adjusting the timing of proposed
interventions to occupiers' planned maintenance programme timeline. Once this
is finalised, these audits will be rolled out across priority sites where
occupiers have not yet commissioned their own audits.
· All landlord-procured electricity in the portfolio is now on
renewable energy tariffs.
· 35% of leases by rent roll now benefit from green provisions,
with conversations on-going across a further 19% to explore incorporating
green clauses.
· The clearance and planting stage of a biodiversity enhancement
pilot has been successfully delivered across the landlord-controlled
landscaping sections of Columbus Retail Park in Andover. Once fully
established the new vegetation will deliver a BNG (Biodiversity Net Gain) of
over +200% against the baseline, with an estimated commercial offsetting value
of between £4k and £6k. While the nominal offsetting value is negligible, it
covers the cost of carrying out the exercise and, crucially, aggregating BNG
benefit across the wider portfolio once further initiatives are rolled out has
the potential to make a tangible difference to UK biodiversity and ecosystem
resilience more widely.
Task Force on Climate-related Financial Disclosures ("TCFD")
We have made voluntary disclosures in line with all 11 TCFD recommendations
and are continuously refining the quality of our reporting. The Company became
an official supporter of the TCFD in 2022, joining more than 2,000
organisations in demonstrating a commitment to building a more resilient
financial system and safeguarding against climate risk through better
disclosures. Further disclosure enhancements are planned, with immediate focus
on increasing Scope 3 data coverage, embodied carbon measurement approach and
scenario analysis development.
Governance
a. Describe the Board's oversight of climate-related risks and Climate-related strategy has been a standing agenda point for the Board since
opportunities. May 2021. This facilitates reporting on a quarterly basis directly to the
Company's Board of Directors on the implementation of the Group's climate risk
strategy.
Climate-related risks continue to be firmly integrated into strategic,
investment and operational decisions made. This has been achieved by, among
other process enhancements, updating the format of Board reporting on
acquisitions to include sustainability-related matters that are aligned with
our ESG policy. The acquisition process also includes instructing
decarbonisation reports for all assets that have EPC ratings lower than a B,
with the aim of identifying specific risks and opportunities of potential
assets.
The Board oversees and monitors the ESG strategy and progress towards approved
ESG goals and targets on a quarterly basis.
Data on progress against KPIs is collated into quarterly reports by the Head
of ESG, utilising the ESG dashboard which is updated on an on-going basis
including input from the wider team.
b. Describe management's role in assessing and managing climate-related Representatives from the Investment Advisor and the Board of Directors came
risks and opportunities together to form the Company's Climate Risk Working Group (CRWG) in 2022. This
Group makes recommendations to the Board regarding climate-risk and is
co-chaired by the Chairman of the Board and the Advisor's recently appointed
Head of ESG.
The CRWG aims to meet a minimum of once a quarter to assess implementation of
the strategy and reports directly to the Board of Directors at each quarterly
Board meeting.
Strategy
a. Describe the climate-related risks and opportunities identified by the To adopt an informed approach to climate risk and opportunity assessment, the
organisation over the short, medium and longer-term Investment Advisor worked with an external consultant in 2021 to establish a
hierarchy of materiality of ESG factors to Lxi's internal and external
stakeholders.
The following climate-related areas were identified as most material:
§ Energy efficiency & CO2 emissions reduction
§ Supplies of clean, renewable energy
§ EPC and MEES compliance
§ Effective risk management and pre-acquisitions due diligence
§ Undertaking affordable improvements
§ Building adaptability & resilience
This served as the initial building block from which a more comprehensive risk
matrix was developed by the Climate Risk Working Group, as summarised in table
below.
Short term (12 months): financial year cycle Medium-term (up to 3 years): business planning and budgeting cycle Long-term (3+ years, out to 2050, capturing the timeframe over which leases
and other material arrangements, such as long-term loans, expire)
Risks Opportunities Risks Opportunities Risks Opportunities
Legislation MEES No immediate risks from MEES legislation as the portfolio does not hold any Obtaining any missing assessments ahead of time will enable us to work on Any properties without an EPC in place by April 2025 would be in breach of Collaborating with tenants to carry out any required works to improve EPCs in Due to the proposed MEES requirements of C by 2027 and A/B by 2030, there is The sooner we can work with tenants to upgrade properties rated C or below,
assets with EPCs below E in England and Wales. any legislation a manner aligned with their own decarbonisation programme and planned a the more of a competitive advantage we can get. However, this needs to be
required improvements well in advance of the planned 2027 & 2030 MEES maintenance will put the portfolio in a strong position, and we would expect risk that leaving works too late could result in increased costs for tenants balanced with the outlook for automatically improved performance thanks to
deadlines to see yield compression and improved rental levels on higher rated assets. of works nearer the time due to demand for materials and contractors grid decarbonisation.
Mandatory business transition planning The UK is moving towards making the publication of transition plans mandatory,
as announced at COP26 (2021) by Rishi Sunak. The consultation period just
finished earlier this year, but the FCA already introduced recommendations for
listed companies and large regulated asset owners to disclose transition plans
as part of TCFD from 2023. This presents a great opportunity to refine
strategy and set specific targets and KPIs, which we are fulfilling through
the recently completed Net Zero Pathways work, but there are also reputational
risk associated with non-compliance / inadequate disclosures.
Policy transition risks It is very likely that MEES is just a start of legislative requirements
relating to building decarbonisation, and that these, along with Carbon
taxation, will get more specific and stringent as time progresses towards the
UK's 2050 Net Zero target. This is supported for example by the recently
published independent review of the Government's Net Zero strategy, as well as
by the emergence of best practice standards such as the currently on-going UK
Net Zero Carbon Building Standard initiative (which will set out performance
targets for operational energy and embodied carbon aligned with a 1.5ºC
pathway, and in our view will be pivotal in guiding future policy), or the
fairly recent move by an increasing number of local authorities to require
whole-life Carbon assessments as a planning prerequisite.
Market Preference for sustainable assets Brown discount: risk mitigation through occupier engagement on improvements;
Green premium: at least a third of the portfolio likely to benefit. Although
the outlook is uncertain, we believe the polarisation is likely to continue
getting more pronounced as time progresses.
Investor preference Misalignment with existing & new shareholder preferences could restrict
investment and negatively impact share price, while ensuring interests are
aligned presents opportunities. One way to more clearly demonstrate the
portfolio ESG profile in the near future will be through the FCA's SDR
labelling, due to come into force in 2024.
Access to finance Our new Facility Agreement is "SLL ready", meaning we have agreed with our Criteria for accessing capital likely to become more stringent over the longer
lenders in principle to add sustainability-linked criteria into the FA, term, but this will present the opportunity to access better rates on
resulting in a +/-5bps adjustment to Margin based on achievement of the borrowing if criteria are met.
agreed
Sustainability Performance Targets (SPTs). We will work closely with our
lenders to develop an appropriate set of SPTs over the 12 month period to
April 2024, with the view to convert the debt to fully Sustainability-Linked
at that point.
Risks to tenant businesses Risks: Supply chain shortages, restricted access to utilities, energy pricing,
carbon pricing; Opportunities: increased revenues from sales of sustainable
products and services. These risks and opportunities are likely to become more
pronounced as time progresses. We continue to monitor developments at a
sector-level and ensure the portfolio is positioned appropriately.
Physical risks Flooding Over the short and medium term, there is a risk of physical damage to real Over the longer-term, assets may become more greatly exposed to physical risk
estate as a result of immediate environment-related factors such as floods. To from extreme weather events and therefore no longer be viable to tenants.
date, the Company has not purchased any asset with a 'high' physical risk on Forward-looking modelling tools become even more relevant over this longer
acquisition, however as assets are owned for a longer period of time we time horizon.
recognise the need to re-asses this. We are currently reviewing options of the
most appropriate forward-looking physical risk modelling tools for the
portfolio.
Other extreme weather events
b. Describe the impact of climate-related risks and opportunities on the We believe climate risks pose material financial risks if not appropriately
business model, strategy, and financial planning managed; however, we have integrated the following processes to ensure any
risks are appropriately foreseen, monitored and mitigated:
Acquisitions - During the acquisition process, we look to assess the true cost
of a potential purchase and how we can transition it to a net zero carbon
pathway, including the eventual adoption of higher EPC standards. The Group
have instructed Zero Carbon reports on all acquisitions with EPC ratings below
a B, and forward-looking climate risk is now included as a DD requirement.
On-going asset management - focus is on tenant engagement and collaboration on
asset decarbonisation, including further investment opportunities for the
Group in line with the detailed ESG strategy. The investment team has a
fortnightly meeting with the Head of ESG to ensure initiatives are progressing
in line with targets.
Financial planning- Given the long, triple-net lease structures in the Group,
property improvement costs towards the Net Zero transition generally sit with
the occupiers. We are budgeting predominantly for ancillary consultancy costs,
associated with supporting our occupiers with the delivery of their Scope 1
& 2 site level emission reduction plans. Providing this support is
crucial, as occupiers' successful delivery of their decarbonisation goals
ultimately translates into our successful delivery of our ultimate Scope 3
target. We continue to monitor the need to include the cost of EPC
improvements in our financial appraisals and forecasting. For example, we have
instructed the first tranche of decarbonisation reports on high value assets
with poor EPC ratings to determine the estimated capex costs of carrying out
improvements. This may in time need to be factored into our financial planning
as we could be expected to share some of the capex costs with tenants. The
Investment Advisor's Head of ESG, the Company Secretary, corporate lawyers and
other third parties continue to keep the Company abreast of any changes in
legislation, enabling us to remain ahead of compliance and take a
forward-view.
Access to capital - Our climate risk strategy is designed to ensure we meet
appropriate sustainability credentials so we can continue to access debt and
equity and partner with lenders at low cost. We are planning to manage the
risk associated with access to capital by providing investors and other
stakeholders with relevant and comparable ESG metrics and disclosures. The
Investment Advisor communicates regularly with the Company's shareholders to
understand their changing parameters and requirements and to ensure we
continue to meet their expectations when it comes to sustainability and
climate-related matters.
c. Describe the resilience of the organisation's strategy against We recognise that climate change poses material risk to our business, both
different climate-related scenarios e.g., different impacts on infrastructure directly and indirectly. As part of our strategic evolution, we are committed
at higher future temperatures, including a 2⁰C or lower scenario. to transparently addressing the transitional and physical risks and
opportunities relevant to the Group.
We are at the initial stages of carrying out quantitative scenario analysis
for the portfolio. As a starting point, we have considered the
Intergovernmental Panel on Climate Change (IPCC)'s latest SSP-RCP scenarios
and developed a matrix assessing key risks and opportunities to the portfolio
under each scenario, taking the following key factors into consideration over
short, medium and long term horizons:
Transitional / structural: market & technology shifts (structural demand
changes to property sectors and likelihood of tenant business resilience),
pressure on tenants' supply chains, energy prices, policy shifts, impact on
property values & stranding risk, and reputation
Physical: physical risk to buildings from extreme weather events
Under the two warming-limiting scenarios (SSP1-1.9 & SSP1-2.6), the most
significant risks and opportunities will come from continued consumer demand
shift for sustainable products and services, policy shifts (e.g. increasingly
stringent building standard requirements, carbon pricing) and resulting impact
on property values in the form of green premia and brown discounts.
There is already increased attention in the market on assets' ability to
adhere to pathways to Net Zero emissions in line with limiting the Earth's
warming to well below 2°C as per the Paris Agreement, measured through tools
such as CRREM. Underperforming these benchmark pathways will increasingly
result in direct impact on valuation as factoring in the costs of remediation
becomes market standard.
Under the three higher warming scenarios (SSP2-4.5, SSP3-7.0 and SSP5-8.5),
the most significant risks and opportunities to the portfolio would emanate,
to varying degrees depending on the scenario severity, from physical risks to
the properties. The outcome would depend on our ability to avoid (through
stock selection and trading) and eliminate (through asset improvements)
physical risks to the properties, as well as our ability to maintain a tenant
mix with robust business longevity even under these challenging physical risk
scenarios.
These physical impacts may include "acute" physical damage from variations in
weather patterns (such as severe storms, floods, drought and over-heating) as
well "chronic" impacts such as sea level rise.
Although all of our leases are Full Repairing and Insuring leases, meaning for
the duration of the tenancy the tenant is responsible for all repair and
upkeep with regulatory standards, we recognise potential financial impacts on
our tenants could in turn impact the Group through tenant default or forced
vacancy. Indeed, our tenants may be financially impacted by physical risks in
the following ways:
· Reduced revenue from decreased production capacity and increased
business disruption (e.g. supply chain interruptions, damages to production
sites, transport issues etc.)
· Reduced revenue from lower sales
· Write-offs of stock or assets (e.g. due to damage to buildings or
equipment)
· Increased costs required for health and safety or to repair
damage
· Increased insurance premiums on assets that are considered 'high'
physical risk
This will in turn have direct impacts on the Company. For example, assets that
become difficult to rent or lay vacant due to tenant default may require
rent-free periods or concessions and valuations are likely to be adversely
affected for assets exposed to more frequent or extreme weather-related
events. The Company mitigates this by maintaining strong relationships with
its tenants to ensure both parties are informed of risks. It also continues to
carry out appropriate due diligence on all new acquisitions so that potential
risks are identified at an early stage; and the potential financial impact is
considered in financial projections.
To date, the Group has not acquired an asset classified as having a 'high'
physical risk as per XDI's assessment framework. However, we recognise the
need to re-assess and monitor exposure to physical risks to reflect new
climate science and forecasts.
We are currently reviewing options of the most appropriate forward-looking
physical risk modelling tools for the portfolio.
Risk Management
a. Describe the organisation's processes for identifying and assessing In addition to the risk management approaches outlined under Strategy (b), the
climate-related risks. following key Climate risks are monitored through the Company's principal
risk register.
- Valuation risk
- Access to capital
- Regulatory risk
These sit on the register alongside all other key organisational risks such as
micro- and macroeconomic, property-specific, operational and compliance risks
and are treated as equal priority.
Responsibility for identifying, assessing and managing climate-related risks,
both those on the principal register and the more detailed risks in Strategy
(b) which are monitored on an on-going basis, are delegated to the Climate
Risk Working Group (CRWG)- under the direct oversight of the Board and which
includes Board members. The CRWG continually evaluates key risks (which
includes sustainability/climate change related risks), the effectiveness of
existing controls and identifies where further mitigation measures might be
required. For example, this approach led to the inclusion of climate
considerations within the acquisition and due diligence process.
Time horizon/ urgency, potential impact magnitude, likelihood of occurrence
and level of direct control over the management are all taken into account
when making decisions on the priority and management of risks.
Transition Plan: The Net Zero Pathway to 2050, developed through our work with
Carbon Intelligence, identifies stranding risks and guides us towards asset
management plans aligned with Science-Based Targets.
The Company's application for membership of the Better Buildings Partnership
in January has been successful, and LXi REIT has been enrolled as a full
member from April 2023 allowing the Group to contribute to leadership in
sustainability best practice as well as to access the latest research, and the
support of its wider membership base.
b. Describe the organisation's processes for managing climate-related
risks.
c. Describe how processes for identifying, assessing, and managing
climate-related risks are integrated into the organisation's overall risk
management.
Metrics and Targets
a. Disclose the metrics used by the organisation to assess climate-related In line with the Group's Net Zero pathway, the following are our ultimate
risks and opportunities in line with its strategy and risk management process. metrics for monitoring on-going progress:
- Delivery against asset-level decarbonisation plans (Scope 1, 2
& 3)
- CO2e emissions & year on year emission reductions
- Building Energy Usage Intensity (EUI) reductions
- Monitoring and mitigation of building-specific physical climate
risk
However, we have also established a set of more detailed core KPIs, developed
based on regulatory requirements, disclosure best practice, conversations with
key investors, industry standard approach to metrics, and work with the
investment team.
We now have an ESG KPIs dashboard in place which is updated on a regular basis
and helps us keep track of progress against targets.
This core set of metrics provides good coverage, satisfies investor and
disclosure framework requirements, and forms a good feedback loop for keeping
the CRWG and the Board updated on progress.
Short term KPIs (updated on an ongoing basis and monitored quarterly):
- Occupier utility consumption data coverage
- Occupier engagement
- Occupiers' own targets and progress
- % Decarbonisation plans for buildings completed (Scope 1, 2
& 3)
- EPCs
- On-site renewable energy generation capacity
- Green lease provisions
b. Disclose Scope 1, Scope 2, and, if appropriate, Scope 3 greenhouse gas Later in this report, we provide disclosure of our Scope 1, 2 and selected
(GHG) emissions, and the related risks. Scope 3 emissions. We arrange our GHG emissions reporting in line with the
Greenhouse Gas (GHG) Protocol Corporate Accounting and Reporting Standard. Our
relevant emissions categories include fuel and energy related activities,
business travel, water use and emissions from downstream leased assets (tenant
emissions) where data is available.
In 2022, we doubled our occupier energy usage data coverage vs 2021, to over
60% by floor area.
c. Describe the targets used by the organisation to manage climate related As a way to ultimately manage the portfolio transition to a low carbon
risks and opportunities and performance against targets. economy, the overarching target of operational Net Zero no later than 2050 has
been set, in line with the UK's legally binding target and reflective of the
long-leased nature of our assets.
Short term targets (to 2025, from a 2022 indicative base):
Occupier energy usage coverage: 2023: 75% | 2024: 85%+
Asset-level decarbonisation audits roll-out: 2023: 15% to have reduction plans
in place by year end | 2024: 30% | 2025: >50%
Social value focus: Complete scope assessment in 2023
Biodiversity enhancement: Pilot and roll-out plan in 2023
Medium to long-term targets (to 2030 and beyond)
Delivery of decarbonisation initiatives in collaboration with occupiers
Portfolio has the potential to achieve a 30% CO2 emission reduction by 2030
off a 2022 indicative baseline
The CRWG reviews progress against approved short-term actions needed to
achieve each longer-term goal and adapts these to ensure continuous
improvement.
Carbon Emissions and Energy Performance Certification
Energy and carbon performance data - headline figures
Landlord emissions continue to make up a negligible portion of the portfolio.
Total like-for-like emissions [EPRA sBPR 302-1] increased +3% for calendar
year 2022 vs 2021, with the increase in like-for-like Scope 3 tenant utility
usage (driver of 99.9% of the portfolio's operational emissions) significantly
more pronounced vs the increase in emissions themselves: +13% growth in
electricity and +5% in fuel consumption.
This was predominantly driven by the following factors:
- Businesses returning to full time operations following
pandemic-related closures in the previous year.
- Considerable increase in fuel consumption [EPRA sBPR 302-1
Fuel-LfL] by the hospitals in the portfolio: due to the return from the
pandemic to private healthcare. We will review and gain further details around
this increase from the occupier.
- Increased electricity usage [EPRA sBPR 302-1 Elec-LfL] by some of
our largest industrial occupiers due to increased demand for goods produced at
their sites within our portfolio. Thorough energy audits and assessment of
energy optimisation potential are high on our agenda.
- Last winter was milder vs the previous year, supporting a lower
increase in overall fuel usage [EPRA sBPR 302-1 Fuel-LfL].
While overall it is good news that continued decarbonisation of the UK
electricity grid is being reflected in lowered emissions relative to the
actual increase in energy consumption, these headline figures underline the
fact that we must continue to urgently press on with helping our occupiers
improve their sites from an energy efficiency perspective.
A more detailed emissions breakdown, including market segment analysis, is
provided in the EPRA sBPR appendix within the Annual Report.
Emissions
Emissions scope 2021 2022
Consumption Emissions (tCO2e) Consumption Emissions (tCO2e)
(kWh/ m3/ miles)
(kWh/ m3/ miles)
Landlord procured gas and refrigerants 1 0 0.0 0 0.0
Landlord procured electricity 2 60,006 12.7 491,688 95.1
Occupier gas consumption 3 94,442,995 17,298.2 113,058,671 20,637.7
Occupier electricity consumption - grid (location-based) 3 108,292,863 22,993.8 131,810,010 25,489.4
Occupier other fuels consumption 3 1,650 0.4 4,889,268 1,045
Downstream services (Investment Advisor's emissions)
Gas consumption (office) 3 2,825 0.5 3,554 0.6
Electricity consumption (office) 3 15,592 3.3 8,019 1.6
Water consumption (m3, office) 3 20 0.0 31 0.0
Business travel (miles) 3 19,295 5.1 9,337 0.7
Total annual emissions 40,314 47,270
Total like-for-like emissions 38,844 40,190
Like-for-like change +3%
1 Data notes
Reporting period The energy and carbon emissions data presented here is for the reporting
period 1 January 2021 to 31 December 2022 and for the comparative period
spanning 1 January 2020 to 31 December 2021. The time periods do not align to
our financial year due to the timing lag around availability of data.
Reporting method We arrange our GHG emissions reporting in line with the Greenhouse Gas (GHG)
Protocol Corporate Accounting and Reporting Standard.
Grid electricity emissions are reported on the location-based method, as well
as providing market-based calculations for reference, reflecting the reduced
emissions from purchasing of renewable electricity.
This reflects the fact that the location-based approach reports on what the
company is physically putting into the air, and while it is useful to show
emissions the company is responsible for through its and its occupiers'
purchasing decisions such as a renewable energy contracts for comparison, we
see the disclosure of our physical emissions as the most relevant.
Carbon scope and reporting boundaries Boundary: We have elected to adopt the Operational Control approach as defined
by the GHG Protocol. As Scope 3 emissions are outside of our direct control,
we do not deem estimation of usage and emissions to be appropriate as the
currently available benchmarks are very generic in their nature and therefore
could result in significant under- or overestimation of usage. Properties
where no tenant utility consumption data was obtained are therefore excluded
from the reported usage and emission figures. Electricity usage data was
obtained from occupiers across 67% of assets by floor area, with 57% coverage
obtained for gas usage and 34% for water.
Scopes: We organise our emission scopes in line with the Better Buildings
Partnership's Climate Commitment Carbon Scope. This means:
• Corporate emissions are not included within the scope
as the focus is on real estate investments and these emissions are not
significantly material. However, we are choosing to voluntarily include
emissions associated with operational activities of the external Investment
Advisor under Scope 3, downstream purchased services, in our target scope for
complete transparency.
• Scope 1 covers landlord purchased fuels and
refrigerants, of which the portfolio has none.
• Scope 2 covers landlord purchased electricity.
• Scope 3 covers tenant purchased energy and
refrigerants, landlord purchased water and landlord managed operational waste.
• In future, we aim to include additional sources of
Scope 3 emissions relating to forward-funded development of new buildings and
emissions from the activities of contractors and other suppliers, for which
data is currently not available.
Assumptions and estimates made We are reporting actual energy consumption data only. The only estimates made
are to bridge gaps in billing by considering the actual usage billed divided
by the number of months covered, multiplied by the number of months without
data.
The Investment Advisor's office emissions have been apportioned as 5% of the
total office emissions (based on number of employees employed by the
Investment Advisor)
Theme parks are excluded from data coverage by floor area, due to the
idiosyncratic nature of these properties' layouts
• Investment Advisor Team business travel: company cars
of the core investment team are now all electric, which is reflected in
reduced business travel emissions
Emissions factor source Conversion factors used from HMRC:
https://www.gov.uk/government/collections/government-conversion-factors-for-company-reporting
Carbon Footprint's residual factors were used for market-based electricity
emissions calculations:
https://www.carbonfootprint.com/docs/2023_02_emissions_factors_sources_for_2022_electricity_v10.pdf
EPC analysis
In this section we present the Group's current EPC ratings as of 31 March 2023
as per the public EPC register, weighted by passing rent.
Of the rated portion of the portfolio in England and Wales, 69% of assets are
rated C or better; 31% are rated D or below. This reflects the age of the
former Secure Income REIT building stock and presents the portfolio with a
significant opportunity to add value through collaborating with occupiers on
EPC improvements and further decarbonisation initiatives. 6% of properties are
in Scotland and thus not subject to MEES, 2% are exempt due to the nature of
the structures and there is still 32% of the portfolio yet to be assessed when
weighted by passing rent; however, this is limited to just 20 assets in total
(6% of portfolio by number of properties) with a high passing rent
concentration.
% EPC by sector, weighted by passing rent: rated assets in England & Wales
A B C U/C A to C D E F G D and below
9.4% 25.8% 32.8% 1.4% 69.4% 21.9% 8.7% 0.0% 0.0% 30.6%
Healthcare 0.1% 2.5% 1.4% 0.0% 4.0% 1.2% 0.0% 0.0% 0.0% 1.2%
Hotel 0.9% 5.8% 8.2% 0.0% 14.9% 13.3% 4.2% 0.0% 0.0% 17.5%
Theme Park 0.0% 4.0% 10.8% 0.0% 14.8% 0.0% 0.0% 0.0% 0.0% 0.0%
Foodstores and essentials 3.1% 7.7% 2.6% 0.5% 13.9% 0.3% 0.0% 0.0% 0.0% 0.3%
Industrial 4.4% 2.5% 1.6% 0.0% 8.5% 1.6% 0.0% 0.0% 0.0% 1.6%
Pubs 0.0% 0.2% 1.4% 0.0% 1.6% 1.7% 4.0% 0.0% 0.0% 5.7%
Arena 0.0% 0.0% 0.0% 0.0% 0.0% 1.4% 0.2% 0.0% 0.0% 1.6%
Car park 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Garden centre 0.0% 1.1% 1.6% 0.0% 2.7% 0.0% 0.0% 0.0% 0.0% 0.0%
Life sciences 0.0% 0.0% 2.4% 0.0% 2.4% 0.0% 0.0% 0.0% 0.0% 0.0%
Drive-thru coffee 0.5% 1.2% 0.1% 0.3% 2.1% 0.0% 0.0% 0.0% 0.0% 0.0%
Education 0.0% 0.1% 0.4% 0.0% 0.5% 1.0% 0.3% 0.0% 0.0% 1.3%
Other 0.4% 0.7% 2.3% 0.6% 4.0% 1.4% 0.0% 0.0% 0.0% 1.4%
1 UC means under construction. We now target EPC B minimum on new forward
fundings.
2 The nature of our Car Park assets, being small areas and open sided, make
them exempt from holding EPCs.
Social
Increasing DE&I in the built environment
Academy of Real Assets
The Investment Advisor continues its membership of The Academy of Real Assets,
a charitable organisation whose aim is to enable its members to deliver
significant positive social impact for underprivileged students from schools
across the UK.
The Academy partners with some of the biggest, best and most-established
social mobility charities and other entities to get access to as many students
at UK State schools as possible, generally via teachers. The mission is to
contribute to the alleviation of educational inequality in particular by
providing students from a less privileged educational background with exposure
to professionals within the industry, to show the opportunities that exist
within the world of property.
The Academy has the following social impact goals:
· To have significant, positive social impact on students from
schools across the UK
· To offer students that do not have connections an off the shelf
contact list to help, guide and advise
· To introduce to all students the huge variety of career
opportunities in the Real Estate, Real Assets and investment worlds
· To encourage and bring about greater diversity and to increase
access
· To connect students with members via The Academy events and
initiatives
The Academy of Real Assets supports members to pool resources to deliver the
maximum social impact, rather than relying on individual entities to deliver
their own strategy and more information can be found at
www.acadrealassets.com.
This year, through the membership with the Academy, a representative from the
Investment Advisor attended a Year 12 Employability Day at Eltham Hill School
in the borough of Greenwich. This volunteering involved helping students with
job interview skills and we are exploring how we can further assist one of the
students who was particularly interested in a career in property. That type of
further tangible action is exactly what we are hoping to achieve from these
events, and we have a number of further events lined up with the Academy later
in the year.
10,000 Black Interns
The Investment Advisor is also supporting the 10,000 Black Interns initiative
in 2023 by taking on two first year university students for a six week paid
summer internship program within its team.
The programme aims to transform the horizon and prospects of young Black
people in the UK by offering paid internship across a wide range of industries
whilst also providing training and development opportunities.
Forward funding
The Company does not undertake direct development but forward funds
development projects. The Company's developments always have support from
local authorities to have received planning consent prior to executing the
funding agreement and as such are expected to provide positive public benefits
and that support local communities through provision of accessible amenities
and employment opportunities. We prioritise the use of local developers.
The Company uses its influence to encourage those developers to identify and
consult with a wide range of stakeholders in the local community and to
minimise any negative impacts or disruption to the local community during
construction.
The Company expects new buildings to meet high standards of environmental
performance and to promote the health and well-being of both the building
occupiers and the wider community. We expect new buildings to have a BREEAM
rating of at least "Very Good" where a rating is obtained. All forward funded
projects that achieved practical completion in the current year that obtained
a rating have achieved this.
People and culture
The Company is committed to diversity and inclusion and our aspiration is to
have Board and key service providers that are representative of society and
our wider stakeholder groups. During the year three new Board members were
appointed and two Board members stepped down. Currently, the Board comprises
of four male and two female Directors, and the Investment Advisor's executive
team comprises 50% male and 50% female employees, an increase in gender
diversity vs the previous year at 62% male to 38% female employees and
achieving gender equality.
Governance
The Company's investment activities are overseen by the Company's
non-executive Board of Directors. The Investment Advisor and the Board work
together to ensure proper execution of the Company's investment strategies,
consistent application of policies, compliance with procedures and compliance
with local and regional regulatory requirements.
The Group has a mature and robust structure of governance, compliant with the
AIC Code of Corporate Governance, which is detailed in the Corporate
Governance section of this annual report. The Group's governance complies with
its enhanced ESG policy that has been adopted during the year.
Key decisions and relationships with stakeholders
Each year, the Group is required under section 172(1) of the Companies Act
2006 to report on how it considered the wider stakeholder needs in its key
decisions. The key stakeholders are considered to be shareholders, tenant
operators, service providers, employees, lenders and society and the
environment.
PROPERTY PORTFOLIO
Tenant group Contracted rent Rental exposure
Merlin £37.9m 19%
Travelodge £37.0m 18%
Ramsay £36.3m 18%
Q-Park £4.5m 2%
SMG £4.4m 2%
The Brewery £3.8m 2%
Bombardier £3.7m 2%
Sainsburys £3.5m 2%
Compass £3.4m 2%
Asda £3.2m 2%
Dobbies Garden Centres £3.2m 2%
Capita £2.9m 1%
Co-op £2.8m 1%
Tesco £2.8m 1%
Other tenants £52.8m 26%
Total £202.2m 100%
Sector Contracted rent Rental exposure
Healthcare £45.2m 22%
Budget hotels £42.8m 21%
Theme parks £37.9m 19%
Foodstores £20.2m 10%
Industrial £13.3m 7%
Pubs £8.7m 4%
Arena £7.1m 4%
Car parks £4.5m 2%
Garden centres £3.2m 2%
Life sciences £2.9m 1%
Drive-thru coffee £2.7m 1%
Education £2.2m 1%
Other £11.5m 6%
Total £202.2m 100%
1 ERVs of assets that had exchanged but not completed at the
reported date are assumed to be let at market rents
Rental uplifts Contracted rent Rental exposure
CPI linked £77.4m 39%
Fixed uplifts £69.1m 34%
RPI linked £50.9m 25%
Open market £4.8m 2%
Total £202.2m 100%
Unexpired lease term to first break Contracted rent Rental exposure
20-years+ £122.5m 61%
More than 14-years, £64.6m 32%
fewer than 19-years
More than 9-years, £11.6m 6%
fewer than 14-years
More than 5-years, £0.9m 0%
fewer than 9-years
Fewer than 5-years £2.6m 1%
Total £202.2m 100%
Location Contracted rent Rental exposure
South East £40.5m 20%
West Midlands £35.2m 17%
East of England £30.2m 15%
North West £23.9m 12%
Yorkshire and the Humber £17.2m 9%
Scotland £13.0m 6%
South West £12.9m 6%
North East £9.7m 5%
East Midlands £8.2m 4%
Germany £7.4m 4%
Wales £2.8m 1%
Northern Ireland £1.2m 1%
Total £202.2m 100%
KEY PERFORMANCE INDICATORS
Our objective is to deliver attractive, low risk returns to shareholders, by
executing our investment policy. Set out below are the key performance
indicators ("KPIs") we use to track our performance.
KPI and definition Relevance to strategy Performance Result
2023 2022
1. Total NTA return Total accounting return measures the ultimate outcome of our strategy, which (10.7)% 18.2% The current year result is below the Group's medium-term minimum target of 8%
is to deliver value to our shareholders through our portfolio and to deliver a per annum.
Total NTA return measures the change in the EPRA NTA and dividends during the secure and growing income stream. A reconciliation of total accounting return
period as a percentage of EPRA NTA at the start of the period. We are is provided in the Additional Information section.
targeting a minimum of 8% per annum over the medium term.
Average compounded annual total accounting return since IPO 7.5% 11.4%
2. Dividend per share The dividend reflects our ability to deliver a low risk but growing income 6.30p 6.00p During the year the Group targeted dividends on a quarterly basis and all
stream from our portfolio and is a key element of our total accounting return.
dividend targets announced were met.
Dividends paid to shareholders and proposed in relation to a period.
Average compounded annual dividend growth since IPO 9.5% 10.7%
3. EPRA Net Tangible Assets ("NTA") The NAV reflects our ability to grow the portfolio and to add value to it 121.1p 142.6p EPRA NTA per share contracted 15.1%.
throughout the life cycle of our assets.
A measure of NAV designed by EPRA to present the fair value of a company on a
long term basis. Assumes that entities buy and sell assets, thereby
crystallising certain levels of unavoidable deferred tax.
Average compounded EPRA NTA growth since IPO (ex-dividend) 3.5% 7.6%
4. Pro forma net loan to value The LTV measures the relative risk of our financing strategy, balancing the 37% 22% Above our medium term maximum target of 35%
additional returns and portfolio diversification that come with using debt
The proportion of our total assets that are funded by borrowings adjusted for against the need to successfully manage risk.
full drawdown of committed capital increasing the net leverage and completion
of assets under construction increasing the portfolio value. Our medium-term
target LTV is 30%. See glossary for calculation.
5. Adjusted earnings per share The Adjusted earnings per share reflects our ability to generate income from 6.7p 7.0p Reflecting 1.06 dividend cover
our portfolio, which ultimately underpins our dividend payments. A
Post-tax Adjusted earnings per share attributable to shareholders, which reconciliation of Adjusted earnings is included in Note 25 to the consolidated
includes the licence fee receivable on our forward funded development assets financial statements.
treated under IFRS as discounts to investment property acquisitions.
6. Total expense ratio The total expense ratio is a key measure of our operational efficiency. 0.9% 1.0% In line with our target
Maintaining a low cost base supports our ability to pay dividends.
The ratio of total operating expenses, including management fees expressed as
a percentage of the average net asset value.
7. Weighted average unexpired lease term The WAULT is a key measure of the quality of our portfolio. Long lease terms 27-years 21 years In line with our investment objective
underpin the security and predictability of our income stream.
The average unexpired lease term of the property portfolio weighted by annual
passing rents. Our target WAULT is a minimum of 20 years.
8. Percentage of contracted rents index-linked or fixed This measures the extent to which we are investing in line with our investment 98% 96% In line with our investment objective
objective, to provide inflation linked returns.
This takes the total value of contracted rents that contain rent reviews
linked to inflation or fixed uplifts.
EPRA PERFORMANCE MEASURES
The table below shows additional performance measures, calculated in
accordance with the Best Practices Recommendations of European Public Real
Estate ("EPRA"). We provide these measures to aid comparison with other
European real estate businesses.
Reconciliations of EPRA Earnings and NAV measures are included in Notes 25 and
26 to the consolidated financial statements respectively. Reconciliations of
other EPRA performance measures in the Notes to the EPRA and alternative
performance measures further below.
Measure and Definition Purpose Performance
31 March 2023 31 March 2023
1. EPRA Earnings Per Share A key measure of a company's underlying operating results and an indication of 8.3p 6.1p
the extent to which current dividend payments are supported by earnings.
A measure of EPS designed by EPRA to present underlying earnings from core
operating activities.
2a. EPRA Net Tangible Assets ("NTA") Assumes that entities buy and sell assets, thereby crystallising certain 121.1p 142.6p
levels of unavoidable deferred tax.
An EPRA NAV per share metric which assumes entities buy and sell assets,
thereby crystallising certain levels of unavoidable deferred tax.
3. EPRA Net Reinstatement Value ("NRV") Assumes that entities never sell assets and aims to represent the value 131.4p 153.7p
required to rebuild the entity.
An EPRA NAV per share metric which assumes entities never sell assets and aims
to represent the value required to rebuild the entity.
4. EPRA Net Disposal Value ("NDV") Represents the shareholders' value under a disposal scenario, where deferred 119.8p 143.7p
tax, financial instruments and certain other adjustments are calculated to the
An EPRA NAV per share metric which represents the Shareholders' value under a full extent of their liability, net of any resulting tax.
disposal scenario, where deferred tax, financial instruments and certain other
adjustments are calculated to the full extent of their liability, net of any
resulting tax.
5. EPRA Net Initial Yield ("NIY") EPRA NIY is annualised net rents on investment properties as a percentage of 5.7% 4.5%
the investment property valuation, less purchaser's costs.
Annualised rental income based on the cash rents passing at the balance sheet
date, less non-recoverable property operating expenses, divided by the market
value of the property, increased with (estimated) purchasers' costs.
6. EPRA 'Topped-Up' NIY The 'topped-up' measure incorporates an adjustment to the EPRA NIY in respect 9.4% 6.6%
of the expiration of rent-free periods (or other unexpired lease incentives
This measure incorporates an adjustment to the EPRA NIY in respect of the such as discounted rent periods and step rents).
expiration of rent-free periods (or other unexpired lease incentives such as
discounted rent periods and step rents). Note under IFRS stepped rents and collared uplifts are treated as lease
incentives and as such are factored into the top up.
7. EPRA Vacancy A 'pure' (%) measure of investment property space that is vacant, based on 0% 0%
ERV.
Estimated Market Rental Value (ERV) of vacant space divided by ERV of the
whole portfolio
8. EPRA Cost Ratio A key measure to enable meaningful measurement of the changes in a company's 9.5% 15.9%
operating costs.
Administrative & operating costs (including costs of direct vacancy)
divided by gross rental income.
9. EPRA LTV (note this is different to pro forma LTV in our KPIs) A key (shareholder-gearing) metric to determine the percentage of net debt 36% 13%
comparing to the appraised value of the properties
Net debt divided by total property portfolio and other eligible assets in line
with EPRA guidance.
The Investment Advisor
The Board has delegated the day-to-day running of the Group to LXi REIT
Advisors Limited pursuant to the terms of the Investment Advisory Agreement.
The Investment Advisory Agreement is reviewed and amended when necessary to
ensure it reflects the relationship between the Board and the Investment
Advisor.
The Investment Advisor comprises property, legal and finance professionals
with significant experience in long-let real estate working exclusively on LXi
Reit. The team has capitalised and transacted over £3.5 billion of commercial
property assets with a particular focus on accessing secure, long-let and
index-linked UK commercial real estate through forward funding and built asset
structures. The core management team (whose details are set out below) is
supported by a team of other finance, legal, property and compliance
professionals and administrative support staff totalling over 15 people. The
key individuals responsible for executing the Company's investment strategy
are:
John White - Joint Fund Manager John entered the commercial real estate market
in 1987 and after qualifying as a chartered surveyor at Allsops moved to the
investment team at Cushman & Wakefield. There he became a partner and
spent the next 18 years advising a range of institutional investor clients on
their UK acquisitions and disposals across the full range of real estate
sub-sectors including retail (in and out of town), offices (London, Thames
Valley and regional cities), logistics, and alternatives. John moved into
private equity real estate in 2007 and co-founded Osprey Equity Partners in
2011 and LXi REIT Advisors Limited in 2016.
Simon Lee - Joint Fund Manager Simon trained and practised as a solicitor at
City law firm, Slaughter and May, from 1999 to 2006, following which he spent
the next 10 years in private equity real estate, co-founding Osprey Equity
Partners in 2011 and LXi REIT Advisors Limited in 2016. Simon's role covers a
wide range of areas, including formulating investment strategies and products,
raising equity and debt finance, asset selection, and negotiating and
implementing transactions with vendors, purchasers, developers, investors,
lenders and joint venture partners.
Freddie Brooks - Chief Financial Officer Freddie trained and qualified as a
chartered accountant in BDO's Real Estate and Construction team, gaining
significant experience in the sector, working with similar listed vehicles,
private property funds, developers and a number of the UK's top contractors.
Freddie is also a qualified chartered surveyor (property finance and
investment pathway) and a member of the RICS. Freddie role covers all
historical and strategic financial matters including debt structuring and
sourcing, annual and interim financial reporting, budgeting and forecasting,
treasury management and the monitoring of internal controls. Freddie is also
responsible for the Investment Advisor's reporting to the Company's Board of
Directors.
Alex Short - Chief Investment Officer Alex trained as a Chartered Surveyor and
has over 25 years of industry experience. In her previous role Alex was Fund
Manager of AEW UK REIT from IPO in 2015 until joining LXI in 2023. AEW UK REIT
was the top performing REIT in peer group and winner of CityWire best
performing UK Property Trust in 2021 and 2022. Before that Alex was Managing
Director at UBS and Fund Manager of UBS Triton and UBS SERF.
Rob Ward - Head of Real Estate Robert Ward, MSc, MRICS, is a qualified
Chartered Surveyor, who trained at CBRE with more than 15 years' experience in
commercial property, specialising in operational real estate and long income
mandates. Rob joined from Prestbury, where he helped to launch and manage
Secure Income REIT through to its merger with LXi in 2022.
Alex MacEachin - Finance Director Alex trained as a Chartered Accountant
specialising in real estate and construction with a focus on REITs. Alex's
previous role was Group Financial Controller at Empiric Student Property plc,
Experience leading all strategic financial matters, including Company
reporting, budgeting and forecasting, treasury management and the monitoring
of internal controls.
Investment Objective and Policy
Investment objective
The investment objective of the Company is to deliver inflation linked income
and capital growth over the medium-term for shareholders through investing in
a diversified portfolio of UK property that benefits from long-term
index-linked leases with institutional-grade tenants.
Investment policy
The Company will target inflation linked income and capital returns through
a diversified portfolio of UK property assets, let or pre-let to a broad
range of tenants with strong covenants on long and index-linked leases.
The Company will invest in these assets directly or through holdings in
special purpose vehicles and will seek to acquire high quality properties,
taking into account the following key investment considerations:
· the properties will be let or pre-let to institutional grade
tenants, with strong financials and a proven operating track record;
· long unexpired lease terms (typically 20 to 30 years to expiry
or first break);
· rent reviews to be inflation linked or contain fixed uplifts;
and
· each property should demonstrate strong residual land value
characteristics.
The Company targets a wide range of defensive and robust sectors, including,
but not limited to, healthcare, theme parks, office, leisure, industrial,
distribution and alternatives - including hotels, serviced apartments,
affordable housing and student accommodation. It also focuses on growth
sub-sector areas such as discount foodstores, budget hotel operators and "last
mile" distribution units fuelled by online retail.
The Company seeks to only acquire assets let or pre-let to tenants with strong
financial covenants and on long leases (typically 20 to 30 years to expiry or
first break), with index linked or fixed rental uplifts, in order to provide
security of income and low cost of debt. The Company only invests in assets
with leases containing regular upward-only rental reviews. These reviews
typically link the growth in rents to an inflation index such as RPI, RPIX or
CPI (with potentially a minimum and maximum level) or alternatively may have a
fixed growth rate.
The Company will neither undertake any direct development activity nor assume
direct development risk. However, the Company may invest in fixed-price
forward funded developments, provided they are pre-let to an acceptable tenant
and full planning permission is in place. In such circumstances, the Company
will seek to negotiate the receipt of immediate income from the asset, such
that the developer is paying the Company a return on its investment during the
construction phase and prior to the tenant commencing rental payments under
the terms of the lease.
Where the Company invests in forward funded developments:
· the Company will not acquire the land until full planning
consent and tenant pre-lets are in place;
· the Company will pay a fixed price for the forward funded
purchase, covering land, construction cost and developer's profit;
· all cost overruns will be the responsibility of the developer/
contractor; and
· if there is a delay to completion of the works, this will be a
risk for the developer/contractor, as they will pay the Company a return on
the agreed acquisition price until practical completion occurs.
The Company may utilise derivative instruments for efficient portfolio
management. The Company will look to actively engage in full or partial
interest rate hedging or otherwise seek to mitigate the risk of interest rate
increases as part of the Company's portfolio management.
The Company will not invest in other investment funds.
Investment restrictions
The Company will invest and manage its assets with the objective of
diversifying risk and will have the following investment restrictions:
· the value of no single property, at the time of acquisition of
the relevant investment, will represent more than 30% of the higher of: (i)
Gross Asset Value; or (ii) where the Company has not yet become fully geared,
Gross Asset Value adjusted on the assumption that the Company's property
portfolio is geared at 30% loan to value;
· the aggregate maximum exposure to any one tenant, at the time
of acquisition of the relevant investment, will be 30% of the higher of: (i)
Gross Asset Value; or (ii) where the Company has not yet become fully geared,
Gross Asset Value adjusted on the assumption that the Company's property
portfolio is geared at 30% loan to value; and
· the Company will invest in no fewer than two sectors at any
time.
The Company will not be required to dispose of any investment or to rebalance
its portfolio as a result of a change in the respective valuations of its
assets.
The Directors are focused on delivering capital growth over the medium term
and intend to reinvest proceeds from any potential future disposals in
accordance with the Company's investment policy. However, should the Company
fail to reinvest the proceeds or part proceeds from any disposal within 12
months of receipt of the net proceeds, the Directors intend to return those
proceeds or part proceeds to shareholders in a tax efficient manner as
determined by the Directors from time to time.
Cash held for working capital purposes or received by the Company pending
reinvestment or distribution will be held in sterling only and invested in
cash, cash equivalents, near cash instruments and money market instruments.
The Directors intend at all times to conduct the affairs of the Company so as
to enable it to qualify as a REIT for the purposes of Part 12 of the CTA 2010
(and the regulations made thereunder).
The Company will at all times invest and manage its assets in a way that is
consistent with its objective of spreading investment risk and in accordance
with its published investment policy and will not at any time conduct any
trading activity which is significant in the context of the business of the
Company as a whole.
Borrowing policy
The Group will seek to utilise borrowings to enhance equity returns. The level
of borrowing will be on a prudent basis for the asset class, and will seek to
achieve a low cost of funds, whilst maintaining flexibility in the underlying
security requirements and the structure of the Group. The Directors intend
that the Group will maintain a conservative level of aggregate borrowings with
a medium-term target of 30% of the Group's gross assets and a maximum level of
aggregate borrowings of 40% of the Group's gross assets at the time of
drawdown of the relevant borrowings.
Debt will be secured at the asset level and potentially at the Company or SPV
level, depending on the optimal structure for the Company and having
consideration to key metrics including lender diversity, debt type and
maturity profiles.
In the event of a breach of the investment policy and investment restrictions
set out above, the Directors upon becoming aware of such breach will consider
whether the breach is material, and if it is, notification will be made to
a Regulatory Information Service.
No material change will be made to the investment policy without the approval
of shareholders by ordinary resolution at any general meeting, which will also
be notified by an RNS announcement.
Section 172 statement
This section of the Annual Report covers the Board's considerations and
activities in discharging their duties under s.172(1) of the Companies Act
2006, in promoting the success of the Company for the benefit of members as a
whole.
This statement includes consideration of the likely consequences of the
decisions of the Board in the longer term and how the Board has taken wider
stakeholders' interests into account.
Stakeholder identification and management
The Board has identified the major stakeholders in the Company's business. On
an ongoing basis the Board monitors both potential and actual impacts of the
decisions it makes in respect of the Company upon those major stakeholders
identified.
Shareholders: As a public company listed on the London Stock Exchange, the
Company is subject to the Listing Rules and the Disclosure Guidance and
Transparency Rules. The Listing Rules include a listing principle that a
listed company must ensure that it treats all holders of the same class of
shares that are in the same position equally in respect of the rights
attaching to such shares. With the assistance of regular discussions with and
the formal advice of the Company's legal counsel, secretary and corporate
brokers, the Board abides by the Listing Rules at all times.
For information on shareholder engagement please see the Governance section of
this report which contains further information on shareholder engagement.
To a great extent, shareholder engagement on behalf of the Company is managed
by the Investment Advisor under the terms of its agreement with the Company.
The Investment Advisor along with the Company's corporate broker regularly
meets with the Company's shareholders to provide Company updates and to foster
regular dialogue.
The members of the Board are available to meet with shareholders at every AGM
and on other occasions as appropriate.
Employees: As an externally managed business, the Company does not have any
employees as all of its functions are carried out by third party service
providers. The Company has a Board of Directors who are non-executive and
receive fixed fee remuneration. The Directors have a range of skills and
experience on which they can draw in weighing up the impact of decisions on
the Company and its stakeholders. The Company's Board receives regular market
and regulatory updates from its professional advisors such as the Investment
Advisor, Broker and Company Secretary. Diversity and representation are
considered as part of the Company's recruitment policy and future director
recruitment processes will reflect this alongside a focus on appropriately
balancing the skills and experience available to the Company.
Tenants: Business relationships with suppliers, customers and other
counterparties are key. Engagement is managed in the main by the Investment
Adviser with a view to fostering good two way communication with respect for
all staff and respecting supplier payment terms.
Board activity and stakeholder considerations
The Board's main working relationship is with the Investment Advisor. The
Group's performance to date has been strong and in all cases has exceeded or
met its stated medium term targets. This performance is underpinned by the
quality of the Investment Advisor's management team. In particular, this is
reflected in the sourcing of high quality assets at attractive pricing, the
management of the risks and exposures of the Company's portfolio, the
development and maintenance of relationships with shareholders and financiers
and the regularity and quality of reporting to the Company's stakeholders.
Most recently the management team has delivered a very significant refinancing
against a challenging debt environment.
The Board retains responsibility for the approval of every material
transaction, including property, debt and other corporate transactions and in
doing so is able to give due consideration to its wider stakeholder group. The
Board relies on the Investment Advisor's sourcing and due diligence
conclusions which are presented to the Board before each transaction. In turn,
the Board offers a robust challenge to validate the quality of each investment
and the impact of all transactions on stakeholder groups.
The Board also deliberates on the quality of each tenant's robustness,
financial viability, reputation, corporate values and operational excellence
in its sub-sector before approving each transaction and monitors it on an
ongoing basis.
The Board's long-term strategic goal has been to maximise shareholder value by
growing the Company in a prudent and accretive manner. As such the Board
carefully considers the merits of raising new equity and debt capital before
it is approved. It works closely with the Investment Advisor to advance due
diligence on a pre-identified pipeline to a defensive position that will allow
the timely execution of deals once new capital is raised. The Board considers
the respective merits and risks of raising new capital and at what price
before any potential equity raise is approved.
Stakeholder engagement during the year
Stakeholder Why should we engage them? How we engage with them Key themes and points of interest Key Decisions and actions taken
Investors In order to better align the Company with that of its shareholders, paying Through a number of shareholder meetings held throughout the year. Also, High and rising dividend; Following the many shareholder meetings the Board has taken the following
particular attention to their aspirations and long-term goals indirectly through the Company's website, Annual Report and Interim Report and
actions:
at the AGM. Growth of the Company;
Completed the merger with Secure Income REIT plc which almost doubled the size
Diversity of the Company's portfolio; of the Company, enabled the Company to quickly diversify its portfolio of
investments
Integration of ESG considerations into all aspects of strategy
ESG has become a key consideration when considering each acquisition. Due
diligence requirements have been enhanced beyond EPC ratings, construction
certification and Net Zero audits, to include forward looking climate risk
assessment, green clauses in leases and a number of social impact and
wellbeing criteria.
Tenants To help the Board develop a clear understanding of the challenges facing Extensive due diligence undertaken as part of tenant selection process. ESG continues to increase in importance to each client, driving demand for In response to the changing needs of the Company's tenants, the Board has
tenants and so that the Board can respond rapidly to the changing needs and
environmentally sustainable buildings that are also accretive to staff health agreed, and the Investment Advisor has implemented, a number of initiatives to
demands of its tenants. Regular communications with tenants are maintained throughout tenancy and wellbeing and foster opportunities to add value to local communities. The improve the environmental impact of certain of its sites where deemed
agreement especially during times of uncertainty (i.e. lockdown). evolving business plans of the Company's tenants also identify the changing appropriate, including:
needs of the end customer, particularly the increase in online shopping along
Tenant and industry changing needs are monitored; with a ubiquitously growing demand for sustainable products, services and Installing EV charging points;
infrastructure (including EV chargers)
The Board are focused on asset management initiatives to assist tenants in Installing solar panels;
achieving the maximum value from each site and thereby, increasing each sites
strategic importance to the tenant and in doing so increasing the security of Improved EPC rating;
the Company's revenue stream.
Taking measures to protect sites at risk from severe weather events e.g.
flooding.
Exploring opportunities for biodiversity enhancement
Supporting tenants with high quality decarbonisation audits at their sites
Assessing opportunities to fund building fabric and M&E improvements
through return generating investment
Deploying additional resource into evaluating opportunities to collaborate on
local social impact initiatives
Key Service Providers As an externally managed investment trust, the Company conducts all its The Board performs an annual evaluation of all of its key service providers to The conclusion of the annual evaluation of the Company's service providers did No issues were identified during the year and the Board confirmed that they
business through its key service providers. ensure inter alia that the Company's values remain aligned. The Board has not raise any concerns. remained appropriate and that their appointment continue.
regular interaction with the Investment Advisor, AIFM, Broker, Company
In order to better align the Company's values with that of its key service Secretary, Administrator and Depositary and receives reports on the During the year the Board resolved to appoint a new Company Secretary and on 6
providers. performance of the rest of the key service providers by the Investment Advisor March 2023 LSDC Nominee Secretary Limited was appointed as Company Secretary.
and Company Secretary
To ensure the challenges faced by the Company's key service providers are
identified and considered by the Board.
Society and the environment To ensure that the Company's activities have a positive impact on communities The Board, via their Investment Advisor, seek to engage with its tenants and The Board has become aware that there is strong focus on ESG matters at The Company has adopted an ESG policy and climate risk strategy that ensure
and the environment. local communities to gain a greater understanding of their concerns and views certain sites. Social concerns at certain sites are considered. that society and the environment are considered whilst implementing its
investment strategy. The ESG policy is available on the Company's website and
the Environmental, Social and Governance report is included in the Annual
Report. Further detail on achievements to date and a plan for the future is
covered in the Company's ESG Strategy and Roadmap to Net Zero Carbon document
available on the website.
Lenders To ensure the Company's lending needs continue to be met. The Group works closely with lenders to maintain a constructive relationship The Investment Advisor takes into account the terms of its loan agreements The Group uses leverage with robust and resilient structures. Including
through ongoing engagement. The Investment Advisor regularly discusses ongoing when implementing the investment strategy conservative covenants with ample headroom and fixed or hedged interest costs.
To ensure the values of the Company's lenders are aligned with that of the initiatives and portfolio matters with its lenders.
Company's.
Principal risks and uncertainties
The Board of LXi REIT plc has overall responsibility for risk management
including reviewing the effectiveness of the risk management processes and
internal controls which are operated by the Investment Advisor and the
Administrator. As part of their risk management responsibilities at least
twice yearly and more often if needed, the Investment Advisor undertakes a
formal review to identify new risks and review existing risks. This review
considers the velocity of each risk to highlight significant emerging risks
that are raised and discussed with the Board and Audit Committee. The
principal risks outlined below have the potential to materially impact the
execution of the Group's strategy and business model.
Changes to principal risks and uncertainties
In the September 2022 interim report, it was communicated that the following
risks were no longer deemed principal risks of the Group but remain on the
internal risk register for monitoring:
· Covid-19 global pandemic
· Competition for properties
· REIT status
The following risk has been added as principal risks in the second half of the
year:
· Ability to access attractive capital for refinancing
The Board has increased the probability relating to the property valuation and
tenant default risks from low to moderate. This is driven by the wider
macroeconomic environment in the UK that has seen high inflation levels,
increasing interest rates and a slowing economy, with the possibility of
entering an economic recession. A recessionary environment could negatively
impact real estate valuations and increases the possibility of tenants
entering financial difficulty and in turn raises the risk of their defaulting
on contractual rental obligations.
Principal risks and uncertainties
Risk Mitigant Probability Impact
Macroeconomic related risks
Ability to access attractive capital for refinancing risk (new risk in the The Board reviews the Group's financing arrangements and considers options for Moderate High
year) refinancing well ahead of maturity. There remain opportunities to find
attractive leverage terms through for example inflation linked debt, hybrid
The UK is currently experiencing high levels of inflation and the Bank of debt/equity products and 'income strip' sales, such as the Group executed
England has responded by multiple successive interest rate increases, during the period, should the Group need to utilise these options in the
contributing to an increasing cost of debt finance. The UK has also been future.
impacted by global banking and credit supply challenges.
The post refinancing weighted average term to maturity of the Group's debt is
6 years and the Group has no refinancing events within the next 12 months. The
next refinancing event for the Group is December 2024.
One response to a lack of financing would be a sale of assets if the
investment market supported it; at current valuations, there is significant
headroom over debt. Another response would be to raise equity to repay debt.
Tenant default risk Covenant reviews on all tenants over 2% of portfolio rents are provided to the Moderate (from low) Moderate
Board quarterly for review.
The current environment has increased the risk of tenant default, the extent
of which varies significantly by business sector and individual companies. Guarantors are in place for major tenants with financing from global
operations of major businesses underpinning rents.
The Group's revenues are concentrated among the top three tenants,
contributing to over 55% of total contracted income. A tenant or guarantor Robust monitoring of rent collections with 100% collection throughout the
could fail to meet its lease obligations because of the specific operational year. Rent collection of 100% is calculated as cash rent collected from
performance of a business at one of the Group's properties in particular or tenants in respect of the financial year of £160.1m as a percentage of the
because of issues with the capital structure of that business. This risk is total rent demanded in respect of the financial year of £160.2m.
elevated due to current wider economic challenges and the risk the UK economy
enters a recession.
Dividends payable are dependent on the rent collection of the group and
covenant compliance.
Macroeconomic challenges Inflation is monitored closely by the Board. The Group's portfolio rent High Moderate
reviews include a mix of fixed, upward only capped and collared uplifts as
The UK is experiencing historic price rises with the highest inflation rate in well as some uncapped rent reviews, to hedge against a variety of inflationary
40 years, and a slowing economy. The Bank of England has responded by outcomes. Where lease agreements facilitate data collection, the Group also
successive interest rate increases which could lead to a sharp decline in monitors rent cover and asset level performance.
economic activity, stock markets and possibly stagflation. A recessionary
environment could impact real estate valuations. The Group also maintains significant debt covenant headroom to provide
protection against a range of economic scenarios.
Continued high inflation may cause contracted rents to exceed market levels
and result in the softening of valuation yields. Where leases have capped The Group has interest rate caps and swaps in place for all drawn debt over
rental uplifts, high inflation may cause rent reviews to cap out at maximum the period to maturity. This covers 99% of all committed debt. The Company
values, causing rental uplifts to fall behind inflation. intends to hedge the remaining debt by the time it is required to be drawn.
Increasing interest rates may cause the company to find it difficult or costly
to finance through debt in the future.
Business objective risks
Geopolitical risk The Board recognises that the level of uncertainty makes the risk difficult to High Moderate
mitigate.
Political changes or political instability impacting the Group's performance
through changes in regulatory requirements and applicable laws, and political, The strength of our tenant and guarantor group, tied with our significant
economic or other developments. covenant headroom levels, reduces the risk of political and economic
uncertainty impacting our Company and it should be well positioned to
A change in government has the potential to impact taxes, spending, withstand any downturn.
environmental and other regulations that could impact the Company.
Major tenants have a long track record of trading through difficult economic
Russia's invasion of Ukraine in February 2022 contributed to a surge in global cycles.
energy and food prices. The extent and impact of military action, resulting
sanctions and further market disruptions is unpredictable which increases the With the exception of one German asset amounting to less than 4% of total
uncertainty, and challenges of tenant operators as well as consumer confidence contracted rent, all Group investments are in the UK.
and financial markets. This could lead to a recession should the conflict move
towards a broader regional or global one.
Property and real estate risks
Property valuation The Group only acquires properties with strong fundamentals that are of Moderate (from low) Moderate to high
strategic importance to their tenants. The Group aims to hold assets for
The Group invests in commercial properties. Property is inherently difficult long-term income and embeds income growth into leases which contributes toward
to value due to the individual characteristics of each property. As a result, positive valuation movements.
valuations are subject to uncertainty and there can be no assurance that the
estimates resulting from the valuation process will reflect actual sales An experienced independent third party valuer has been appointed to carry out
prices that could be realised by the Group. bi-annual property valuations.
Such investments may be illiquid; they may be difficult for the Group to sell The performance of independent third party service providers, including the
in a timely manner and the price achieved on any realisation may be at a property valuer, is regularly reviewed by the Board.
discount to the most recent prevailing valuation of the relevant property.
The valuer inspects each property at least once annually.
Reported property valuations are at a point in time and not an indicator of
future performance. The Investment Advisor agrees all information included in the valuation report
back to source data each time the portfolio is valued and holds meetings with
The Group's independent third party valuer relies on the information provided the valuer to discuss each valuation produced.
by the Investment Advisor to produce its valuations. The valuer does not use
source documents. An error in the information provided to the valuer could The data provided to the valuer is reviewed internally by the Investment
result in material error in the property valuation. Advisor and by the Board of Directors of the Group.
The Board meets separately with the valuers to discuss each valuation.
Tenant default risk The Investment Advisor undertakes thorough due diligence before proposing Moderate (from low) Moderate
investments to the Board and only proposes assets let to strong tenants with
Dividends payable by the Group will be dependent on the income from the proven operating track records who should be able to pay the rents as and when
properties it owns. Failure by one or more material tenants to comply with they are due. The assets we hold are also key operating assets to our tenants
their rental obligations could affect the ability of the company to pay meaning that the renal income is secure. We also closely monitor rent
dividends receipts.
The Investment Advisor continues to monitor the creditworthiness of its tenant
and guarantor counterparties by quarterly reviews of operating performance and
liquidity, as well as reviews of other data including credit ratings and
press. The Investment Advisor has regular communication with tenants to
discuss the operating performance of its assets as well as at a corporate
level.
The Investment Advisor focusses on sectors that have a competitive tenant
market and properties that demonstrate strong fundamentals such as low rents,
low level of specification and strong trading performance at an asset level.
These factors protect against the potential downside impact of tenant default
as the property is attractive to alternative users.
The Investment Advisor reports covenant reviews on all tenants over 2% of the
portfolio to the Board quarterly for review.
Compliance risks
Operating within banking covenants The Group aims to acquire property with a low loan to value ratio where there Low High
is significant headroom for valuation movements and significant ICR headroom.
The Group's borrowing facilities contain certain financial covenants relating
to Loan to Value ratio and Interest Cover ratio, a breach of which could lead The Investment Advisor and/or AIFM monitor compliance with the banking loan
to a default on the loan, or which may lead to penalty interest rates, covenants. In addition we have a number of cure rights under our facilities if
accelerated amortisation or 'cash traps'. The Group must continue to operate needed.
within these financial covenants to avoid penalties or default.
The Investment Advisor reports quarterly to the Board on the various debt
covenants. The Investment Advisor reports on the headroom of each covenant
level under various sensitised scenarios and also carries out reverse stress
testing to identify the point at which covenants would be breached.
Operational risks
Dependence on the Investment Advisor The Board has executed a long-term Investment Advisory Agreement. securing the Low High
services of the Investment Advisor until 6 July 2028. Key Person provisions
The Group relies on the Investment Advisor's services, market intelligence, exist in the Investment Advisory agreement relating to the senior executives,
relationships and expertise. To a large extent, the Group's performance is namely Simon Lee, Frederick Brooks and John White. The provisions require that
reliant on the continued service of the Investment Advisor. the individuals' time is spent exclusively in relation to the Company and that
the departure of any two of those individuals would require a replacement of
A termination of the Investment Advisory Agreement would have an adverse at least equal standing. Failure to replace the Key Person could result in
impact on the Group's performance if an acceptably high quality alternative termination of the Investment Advisory contract.
replacement could not be found in a timely manner.
The Board meets regularly with the Investment Advisor to promote a positive
working relationship and the performance of the Investment Advisor is
monitored by the Management Engagement Committee.
The Investment Advisory fee is a sliding scale % based on market
capitalisation to align the Investment Advisor's interest with those of the
shareholders. The senior members of the Investment Adviser are also
shareholders in the Company, further aligning their interests.
The Investment Advisor is contractually required to grow its own resource to
properly service the needs of the business and this has been demonstrated by
the recruitment of additional personnel where appropriate to support the
continued effective management of the Company.
Climate-related risks
Property valuation During the period the Investment Advisor recruited a Head of ESG who works Moderate High
with the Board to develop a road map to an energy efficient property portfolio
As institutional property investors and owners increase their focus on climate including an appropriate policy for minimum energy performance across the
risk, there is likely to become a larger pool of capital looking to invest in Group's assets, as explained in the ESG section of this report.
energy efficient assets as well as a pool of capital migrating away from
certain less efficient assets. A Climate Risk Working Group has been created to identify, assess and manage
climate related risks. Members of the working group include the Chairman of
Although this represents an opportunity for those best-in-class assets to the Board of Directors.
achieve a 'green premium', there is likely to be a dwindling pool of capital
willing, and a wider yield demanded, to invest in assets that are less energy While there is still a lack of clarity on where responsibilities under the
efficient. The combined effect may result in greater polarisation of property various regulations will sit between landlord and tenants, the Investment
values and/or have an impact on rental values. Advisor has worked with consultants to obtain high level costs estimates to
(a) improve EPCs to levels required by the next stage MEES (currently in
The assets within the Group's portfolio that are less energy efficient may be consultation), (b) decarbonise buildings fully to Net Zero, as per UK ultimate
exposed to downward pressure on valuation or increased pressure to invest in 2050 legally binding target. Immediate strategic focus is on those assets
the improvement of individual assets. where costs of remediation are likely to be particularly high, it's unlikely
the tenant would undertake any of the improvement works.
Due to the fast-evolving landscape this is a key area to monitor.
Access to capital The Company manages the risk associated with access to capital through the Moderate High
implementation of relevant, transparent and comparable reporting to
There is a risk that investor sentiment restricts the Company's ability to shareholders, investors and the wider stakeholder group.
grow through continued investment from existing and new shareholders if
investors do not see the Company as fitting within their own investment The Investment Advisor also regularly communicates with the Company's
criteria. This could potentially impact share price and access to capital. shareholders and lenders to discuss changing parameters and requirements for
investment.
As we see an increase in 'green debt' issues (bonds and RCFs), we are seeing
an increased preference for lenders toward products with 'green' parameters Shareholders have increased their focus on data collected by the Company and
and a cheaper cost of debt for those instruments. Providers of finance for the consistency of ethos, particularly when it comes to sustainability and
Company may set specific climate risk related parameters for counterparties climate-related matters.
(by policy or by law) that will reduce the Company's access to capital if it
does not meet the relevant criteria, or they may increase the Company's cost Focus is on data coverage improvement (doubled for 2022 calendar year),
of debt. improvements to our disclosures and tangible implementation of decarbonisation
measures at asset level in collaboration with tenants.
Regulatory Risk The Board remains abreast of changes in legislation through the work of the Moderate High
Climate Risk Working Group and engages experts where needed.
Changes in legislation over the longer-term as well as other factors such as
(from low)
the energy efficiency of real estate being incompatible with legislation and The Group's overall climate risk strategy is designed to ensure that the
targets that impact the occupier, may result in our assets becoming unlettable Company meets the appropriate 'green' credentials that will continue to allow
or other costs, such as taxes or fines being levied against assets that it access debt and equity capital markets on acceptable terms.
perform poorly in terms of climate impact.
Proposed updates to MEES regulation, any further developments in relation to
the proposed Carbon Emissions (Buildings) Bill, any advancement in costing
carbon in construction as proposed by the parliamentary Environmental Audit
Committee and the planned mandatory publication of transition plans by
businesses are being closely monitored.
Going Concern and Viability
The financial statements of the Group and Company have been prepared on a
going concern basis.
The Group has an Investment Grade credit rating, a healthy liquidity position
and comfortable headroom against financial covenant levels. In light of
current macroeconomic uncertainty, we draw comfort from the Group's robust
balance sheet and high-quality portfolio of commercial property assets let or
pre-let on long term, index-linked leases to a wide range of strong tenant
covenants highly diversified by tenant, sector and location.
The completion of the acquisition of Secure Income REIT during the year
provided further strength and resilience to the balance sheet through scale,
with net assets increasing from £1.3bn at 31 March 2022 to £2.1bn at 31
March 2023. The Group also completed a refinancing of over £700m of debt post
year end and extended a £60m facility during the year. The refinancing
increased the weighted average term to maturity from 3 years at 30 September
2022 to 6 years at 31 March 2023.
Contracted rental income grew from £79.7m in 2022 to £202.2m in 2023 while
the EPRA cost ratio decreased from 15.9% to 9.5%, showing increased earnings
generation which will support liquidity.
In particular, the Board has regard to the following characteristics of the
Company in assessing going concern and viability:
Low-cost debt facilities, with comfortable covenant headroom
· The Group's pro-forma net loan to value ("LTV") as at 31 March
2023 was 37%, following a £232m repayment of the Merlin A Serling facility
during the year. Following the Group's refinancing event after the year end,
the pro-forma net LTV remains at 37%
· The Group's portfolio is currently valued at £3.4bn reflecting a
valuation yield of 5.4%, a 70bps spread from the weighted average cost of debt
of 4.7% pa, a slight increase on the pre-refinancing cost of debt of 4.2% pa
· The Group has comfortable headroom to LTV and ICR covenant levels
within each facility at covenant levels at 31 March 2023 and at
post-refinancing pro-forma covenant levels
· The total weighted average cost of drawn debt across all
facilities post refinancing is capped at 4.7% pa over the next three-year
period
· No breaches of loan covenants during the forecast going concern
period
Defensive and diversified portfolio that is 100% let or pre-let on long leases
to strong tenant covenants
· The Group's portfolio is 100% let or pre-let to over 80 strong
tenants, across 13 sub-sectors. Furthermore, the tenants are the main trading
or parent companies within the tenant groups with strong financial covenants
· The Group draws comfort from the financial robustness of the
major tenants and analysis and reports to the Board the financial covenants of
all tenants contributing to >2% of contracted rent roll on a quarterly
basis
· The Group benefits from a secure income stream of leases with an
average 27 years to first break across the portfolio. Each lease is drawn on a
fully repairing and insuring basis - tenants are responsible for repair,
maintenance and outgoings, so there is no cost leakage for the Company
· 100% rent collected in the year from tenants
Strong liquidity
· At 31 March 2023 the Group had net assets of £2.1bn (31 March
2022: £1.3bn) and a cash balance of £74.4m (31 March 2022: £72.5m),
including secured cash of £29.1m
· Post balance sheet date, the Group completed the refinancing of
various facilities that were due to expire in the near term resulting in total
borrowings of £1,298.6m
Virtually all rent has inflation-protection, through indexed or fixed uplifts,
providing substantial protection and the opportunity to generate rental growth
in a high inflationary environment.
Debt maturity
Post refinancing, the Group has a 6-year weighted average term to maturity
with no debt maturing within 12 months of the approval date of the financial
statements. The next refinancing event relates to the £60m HSBC leisure
facility which falls due in December 2024. The Group's financial projections
show there are sufficient funds for the facility to be repaid in full from
free cash. The next large refinancing event following is in October 2025 and
relates to the £293m AIG healthcare facility and represents 23% of the total
post refinancing committed debt.
LXi REIT plc Company
Although the Company has net current liabilities, there are sufficient
distributable reserves to cover the final dividend for the 12 months to 31
March 2023.
Although the intercompany debt within the PLC is classed as non-current, this
debt is technically due on demand the sub groups have sufficient equity to
repay these liabilities.
Going concern statement
The Board have considered the period to 30 June 2024 for the going concern
assessment. Based on the considerations above and on stress tests and reverse
stress tests, the Board believes that the Group and the Company have the
ability to continue in business for at least twelve months from the date of
approval of these financial statements and therefore have adopted the going
concern basis in the preparation of this financial information.
Conclusion
On this basis, we consider that there are no material uncertainties in
relation to the Group or Company's ability to:
1) continue in operation for the period of at least 12 months from the
date of approval of the consolidated financial statements
2) Meet its liabilities as they fall due
Longer term viability model
Viability statement
In accordance with the AIC Code of Corporate Governance, the Board must assess
the prospects of the Group over a longer period than the 12 months required by
the 'Going Concern' provision.
The financial projections used in this report cover a period that is longer
than a number of the Group's debt facilities and hedging instruments in place.
It is assumed within the projections that these facilities and hedging
instruments are renewed or taken out by an equivalent financing arrangement
with consistent terms to the current refinanced rates when they expire. This
is supported by SONIA forward swap rates at 31 March 2023 being lower than the
overall average capped cost of debt across all facilities.
Five years to 31 March 2028 is considered by the Board to be an appropriate
viability period for the following reasons:
· The Group's weighted average debt maturity at 31 March 2023 was
5.7 years
· HM Treasury provide medium term inflation forecasts to 2027 which
are taken as the inflation forecast assumptions in the projections
· The Group has a WAULT of 27 years, representing secure and
predicable income during that time frame
· 44% of leases contain five yearly rent reviews which allows for
the forecasts to include the majority of rent reviews
· Five years is covered by the Group's medium term detailed
financial projections
Covenant compliance has been modelled over the viability period and the
Investment Advisor has presented to the Board for its consideration the
sensitivity of the financial projections to key assumptions impacting
compliance with secured debt covenants.
The sensitivities performed were designed to be severe but plausible; and to
take full account of the availability of mitigating actions that could be
taken to avoid or reduce the impact or occurrence of the underlying risks:
Downturn in economic outlook: key assumptions including tenant default, void
periods and income growth were sensitised to reflect reasonably likely levels
associated with a longer-term economic downturn. The financial projections
include rental increases in line with rent reviews, meaning the tightest
forecasted covenant headroom in the viability period is the current LTV and
ICR covenant headroom levels.
Restricted availability of finance: The Group's first significant refinancing
event (assuming all extension options are taken) is December 2024. It is
forecast that the Group would have sufficient cash to repay this facility. The
next large refinancing event falls in October 2025. The Group's policy is to
arrange alternative finance in advance of expected requirements and the
Directors have reasonable confidence that an extension, additional or
replacement debt facilities will be put in place prior to the refinancing
date. Some assurance is taken from the successful recently completed
refinancing. Furthermore, the Group has the ability to make disposals of
investment properties to meet the future financing requirements if necessary
and has demonstrated its ability to do so.
Sensitivity analysis
Analysis performed
Loan covenant reverse stress test
We have performed analysis to test the extent to which the valuation of our
current portfolio and rental income should have to fall (due to contractual
nature of income and lease length, this could only be the result of a tenant
default) in order to result in a breach in each facility for the debt profile
as at 31 March 2023 and the post refinancing debt profile. All facilities at
31 March 2023 have comfortable headroom to covenants, with the tightest LTV
covenant requiring a 31% reduction in value before a breach and the tightest
ICR covenant requiring a 40% loss of rent before a breach. This represents our
'reverse stress test' and shows at what point the Group would breach its
covenants.
We have also carried out a 'reverse stress test' on the current post
refinancing position which shows comfortable headroom to covenants, the
tightest LTV covenant requiring a 30% reduction in value before a breach and
the tightest ICR covenant requiring a 31% loss of rent before a breach. For
the facilities that contain cash trap covenants, the tightest covenant would
require a 30% reduction in value and a 27% loss of rent before a breach.
In the unlikely event portfolio valuations decrease by the amount required to
trigger a breach, the Group has a number of options available to rectify a
breach. These include revising dividend payments, considering a rights issue
and disposal of assets. Similarly, if rent reduced by an amount to trigger a
breach, the Group is able to cash cure with uncommitted cash from elsewhere in
the Group.
Conclusion
On this basis we recommend that the Board approves the going concern and
longer-term viability section of the annual report.
Approval
The Strategic Report was approved by the Board of Directors
Cyrus Ardalan
Chairman
6 June 2023
Statement of Directors' responsibilities
The directors are responsible for preparing the annual report and the
financial statements in accordance with UK adopted international accounting
standards and applicable law and regulations.
Company law requires the directors to prepare financial statements for each
financial year. Under that law the directors are required to prepare the Group
financial statements in accordance with UK adopted international accounting
standards and have elected to prepare the Company financial statements in
accordance with United Kingdom Generally Accepted Accounting Practice (United
Kingdom Accounting Standards and applicable law). Under Company law the
directors must not approve the financial statements unless they are satisfied
that they give a true and fair view of the state of affairs of the Group and
Company and of the profit or loss for the Group for that period.
In preparing these financial statements, the directors are required to: •
select suitable accounting policies and then apply them consistently;
· make judgements and accounting estimates that are reasonable and
prudent;
· state whether they have been prepared in accordance with UK
adopted international accounting standards, subject to any material departures
disclosed and explained in the financial statement;
· prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Group and the Company will
continue in business;
· prepare a directors' report, a strategic report and directors'
remuneration report which comply with the requirements of the Companies Act
2006.
The directors are responsible for keeping adequate accounting records that are
sufficient to show and explain the Company's transactions and disclose with
reasonable accuracy at any time the financial position of the Company and
enable them to ensure that the financial statements comply with the Companies
Act 2006.
They are also responsible for safeguarding the assets of the Company and hence
for taking reasonable steps for the prevention and detection of fraud and
other irregularities. The Directors are responsible for ensuring that the
annual report and accounts, taken as a whole, are fair, balanced, and
understandable and provides the information necessary for shareholders to
assess the Group's performance, business model and strategy.
Website publication
The directors are responsible for ensuring the annual report and the financial
statements are made available on a website. Financial statements are
published on the Company's website in accordance with legislation in the
United Kingdom governing the preparation and dissemination of financial
statements, which may vary from legislation in other jurisdictions. The
maintenance and integrity of the Company's website is the responsibility of
the directors. The directors' responsibility also extends to the ongoing
integrity of the financial statements contained therein.
Directors' responsibilities pursuant to DTR4
The directors confirm to the best of their knowledge:
· The financial statements have been prepared in accordance with
the applicable set of accounting standards, give a true and fair view of the
assets, liabilities, financial position and profit and loss of the Group.
· The annual report includes a fair review of the development and
performance of the business and the financial position of the Group and
Company, together with a description of the principal risks and uncertainties
that they face.
Fair, balanced and understandable
The Directors confirm that to the best of their knowledge the Annual Report
and Accounts taken as a whole is fair, balanced and understandable and
provides the information necessary for Shareholders to assess the Company's
performance, business model and strategy.
Approval
This Directors' responsibilities statement was approved by the Board of
Directors and signed on its behalf
Cyrus Ardalan
Chairman of the Board of Directors
6 June 2023
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Year ended Year ended
31 March 2023 31 March 2022
Note £m £m
Rental income 4 203.5 58.5
Property expenses (5.3) -
Gross profit 198.2 58.5
Administrative and other expenses 5 (18.8) (9.3)
Operating profit before movements in investment property and financial 179.4 49.2
instruments
Change in fair value of investment property 8 (406.7) 117.7
Change in fair value of financial instruments 16 22.2 1.2
Loss on disposal of investment property 8 (2.8) -
Operating (loss)/ profit (207.9) 168.1
Loss on disposal of financial instruments (4.6) -
Loss on early extinguishment of debt 6 (20.6) -
Finance costs 6 (54.0) (6.8)
(Loss)/profit before tax (287.1) 161.3
Taxation 7 (1.0) 0.7
(Loss)/profit for the year (288.1) 162.0
Other comprehensive income
Currency translation gain 1.3 -
Total comprehensive (loss)/income attributable to shareholders (286.8) 162.0
(Loss)/earnings per share - basic and diluted 25 (19.2p) 22.8p
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
Company number: 10535081
31 March 2023 31 March 2022
Note £m £m
Non-current assets
Investment property 8 3,569.6 1,480.1
Fixed assets 0.2 -
Derivative financial instruments 16 29.3 -
Total non-current assets 3,599.1 1,480.1
Current assets
Trade and other receivables 11 16.8 19.4
Assets held for sale 9 32.3 19.0
Deferred acquisition costs 2.6 0.7
Derivative financial instruments 16 3.1 1.2
Cash and cash equivalents 12 74.4 72.5
Total current assets 129.2 112.8
Total assets 3,728.3 1,592.9
Current liabilities
Trade and other payables 13 82.6 38.6
Bank borrowings 14 508.7 -
Total current liabilities 591.3 38.6
Non-current liabilities
Bank borrowings 14 729.8 240.0
Leasehold liabilities 15 43.7 12.5
Other financial liabilities 13 254.7 -
Other payables 0.7 1.1
Total non-current liabilities 1,028.9 253.6
Total liabilities 1,620.2 292.2
Net assets 2,108.1 1,300.7
Equity
Share capital 17 17.1 9.1
Share premium reserve 17 2,120.8 940.0
Foreign exchange reserve 1.3 -
Capital reduction reserve - 21.0
Retained earnings (31.1) 330.6
Total equity 2,108.1 1,300.7
Net asset value per share - basic and diluted 26 123.0 142.7p
EPRA NTA per share 26 121.1 142.6p
The consolidated financial statements were approved and authorised for issue
by the Board on 6 June 2023 and signed on its behalf by:
Cyrus Ardalan
Chairman
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Year ended 31 March 2023 Share capital Share premium reserve Foreign exchange reserve Capital reduction reserve Retained earnings Total equity
Note £m £m £m £m £m £m
Balance at 1 April 2022 9.1 940.0 - 21.0 330.6 1,300.7
Profit and total comprehensive income attributable to shareholders - - - (288.1) (288.1)
-
Exchange reserve - - 1.3 - - 1.3
Transactions with owners
Issue of ordinary shares in the year 17 8.0 1,180.8 - - - 1,188.8
17
Dividends paid in the year 18 - - - (21.0) (73.6) (94.6)
Balance at 31 March 2023 17.1 2,120.8 1.3 - (31.1) 2,108.1
Reserves are defined in Note 17.
Year ended 31 March 2022 Share capital Share premium reserve Capital reduction reserve Retained earnings Total equity
Note £m £m £m £m £m
Balance at 1 April 2021 6.2 544.5 62.1 168.6 781.4
Profit and total comprehensive income attributable to shareholders - - - 162.0 162.0
Transactions with owners
Issue of ordinary shares in the year 17 2.9 402.6 - - 405.5
17
Share issue costs 18 - (7.1) - - (7.1)
17
17
Dividends paid in the year 18 - - (41.1) - (41.1)
Balance at 31 March 2022 9.1 940.0 21.0 330.6 1,300.7
CONSOLIDATED CASH FLOW STATEMENT
Year ended Year ended
31 March 2023 31 March 2022
Note £m £m
Cash flows from operating activities
(Loss)/profit before tax (287.1) 161.3
Adjustments for:
Finance costs 6 54.0 6.8
Make-whole costs on settlement of debt facility 6 20.6 -
Change in fair value of investment property 8 406.7 (117.7)
Loss on disposal of investment property 8 2.8 -
Loss on disposal of derivative 4.6 -
Change in fair value of derivative (22.2) (1.2)
Accretion of tenant lease incentives 4 (37.8) (9.9)
Tax paid (0.1) -
Operating results before working capital changes 141.5 39.3
Decrease / (increase) in trade and other receivables 4.3 (3.2)
Increase in trade and other payables 23.9 15.3
Net cash flow generated from operating activities 169.7 51.4
Cash flows from investing activities
Purchase of investment properties 8 (80.0) (425.4)
Cash alternative paid to SIR plc shareholders 27 (392.3) -
Interest received 0.4 -
Proceeds from sale of investment property 8 29.5 8.3
Net cash flow used in investing activities (442.4) (417.1)
Cash flows from financing activities
Proceeds from shares issued in the year - 353.8
Share issue costs paid - (7.2)
Dividends paid (89.0) (41.1)
Interest paid (40.4) (6.6)
Payments on other financial liabilities (4.5) -
Interest received on in-the-money financial instruments 2.2 -
Purchase of interest rate cap 16 (26.5) (0.1)
Proceeds from recognition of income strip 15 257.0 -
Proceeds from close out of interest rate cap 16 23.1 -
Make-whole costs on settlement of debt 6 (20.6) -
Drawdown of borrowings 14 499.0 239.7
Repayment of borrowings 14 (322.6) (186.0)
Loan arrangement fees paid (3.1) (1.4)
Net cash flow generated from financing activities 274.6 351.1
Net (decrease)/increase in cash and cash equivalents 1.9 (14.6)
Cash and cash equivalents at the beginning of the year 72.5 87.1
Cash and cash equivalents at the end of the year 12 74.4 72.5
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of preparation
The financial information contained in this announcement has been prepared on
the basis of the accounting policies set out in the financial statements for
the year ended 31 March 2023. Whilst the financial information included in
this announcement has been computed in accordance with UK adopted
international accounting standards this announcement does not itself contain
sufficient information to comply with IFRS. The financial information does not
constitute the Group's financial statements for the year ended 31 March 2023,
but is derived from those financial statements. Those financial statements
give a true and fair view of the assets, liabilities, financial position and
profit and loss of the Group. Financial statements for the year ended 31 March
2023 will be delivered to the Registrar of Companies following the Company's
Annual General Meeting.
The Independent Auditor's report on the 31 March 2023 financial statements was
unqualified, and did not contain statements under s498(2) or (3) of the
Companies Act 2006.
The financial statements have been prepared for the year ended 31 March 2023.
The comparative information included in the financial statements relates to
the year ended 31 March 2022.
The Group's financial statements have been prepared on a historical cost
basis, as modified for the Group's investment properties and derivative
financial instruments which have been measured at fair value with changes
recognised through the statement of comprehensive income.
The consolidated financial statements are presented in Sterling, which is also
the Company's functional currency, and values are rounded to the nearest
hundred thousand except where indicated otherwise.
Euro denominated results of the German operations have been converted to
Sterling at the average exchange rate for the period since acquisition of
€1: £0.87 which is not considered to produce materially different results
from using the actual rates at the date of the transactions. Period end
balances have been converted to Sterling at the 31 March 2023 exchange rate of
€1: £0.88. The accounting policy for foreign currency translation is in
Note 3.
· Standards effective from 1 April 2022
New standards impacting the Group that have been adopted for the first time in
this set of financial statements are:
· Amendments to IFRS 3 'Business Combinations': reflecting changes
in reference to the Conceptual Framework but not significantly changing its
requirements. The amendment is effective for periods beginning on or after 1
January 2022 but is not expected to have a material impact on the Group's
accounts. The acquisition by the Group of Secure Income REIT in the period
falls outside the definition of a business combination.
· Annual improvements to IFRS standards (applicable to periods
beginning on or after 1 January 2022):
i) IFRS 9: to add clarification of the fees a company includes in
assessing the terms of a new or modified financial liability to determine
whether to derecognise a financial liability.
ii) IFRS 16: the addition of an illustrative example in the standard in
order to remove confusion around lease incentives.
These standards have been assessed to have no significant impact to the Group
as they are either not relevant to the Group's activities or require
accounting which is consistent with the Group's current accounting policies.
· Standards issued not yet effective
The following are new standards, interpretations and amendments, which are not
yet effective, and have not been early adopted in this financial information,
that will or may have an effect on the Group's future financial statements:
· Amendments to IAS 1 which clarifies the criteria used to
determine whether liabilities are classified as current or
non-current (Periods beginning after 1 January 2024). These amendments clarify
that current or non-current classification is based on whether an entity has a
right at the end of the reporting period to defer settlement of the liability
for at least twelve months after the reporting period. The amendment is not
expected to have an impact on the presentation or classification of the
liabilities in the Group based on rights that are in existence at the end of
the reporting period.
· Update to IAS 8 'Definition of Accounting Estimates' to add
clarification around the difference between accounting policies and accounting
estimates including a new definition of 'accounting estimates (Periods
beginning after 1 January 2023).
· Update to IAS 1 and IFRS Practice Statement 2 'Disclosure of
Accounting Policies' in order to help entities apply materiality judgements to
accounting policy disclosure (Periods beginning after 1 January 2023).
There are other new standards and amendments to standards and interpretations
which have been issued that are effective in future accounting periods, and
which the Group has decided not to adopt early. None of these are expected to
have a material impact on the consolidated financial statements of the Group.
· Going concern
The financial statements of the Group and Company have been prepared on a
going concern basis.
The Group has an Investment Grade credit rating, a healthy liquidity position
and comfortable headroom against financial covenant levels. In light of
current macroeconomic uncertainty, we draw comfort from the Group's robust
balance sheet and high-quality portfolio of commercial property assets let or
pre-let on long term, index-linked leases to a wide range of strong tenant
covenants highly diversified by tenant, sector and location.
The completion of the acquisition of Secure Income REIT during the year
provided further strength and resilience to the balance sheet through scale,
with net assets increasing from £1.3bn at 31 March 2022 to £2.1bn at 31
March 2023. The Group also completed a refinancing of over £700m of debt post
year end and extended a £60m facility during the year. The refinancing
increased the weighted average term to maturity from 3 years at 30 September
2022 to 6 years at 31 March 2023.
Contracted rental income grew from £79.7m in 2022 to £202.2m in 2023 while
the EPRA cost ratio decreased from 15.9% to 9.5%, showing increased earnings
generation which will support liquidity.
In particular, the Board has regard to the following characteristics of the
Company in assessing going concern and viability:
Low-cost debt facilities, with comfortable covenant headroom
· The Group's pro-forma net loan to value ("LTV") as at 31 March
2023 was 37%, following a £232m repayment of the Merlin A Serling facility
during the year. Following the Group's refinancing event after the year end,
the pro-forma net LTV remains at 37%
· The Group's portfolio is currently valued at £3.4bn reflecting a
valuation yield of 5.4%, a 70bps spread from the weighted average cost of debt
of 4.7%, a slight increase on the pre-refinancing cost of debt of 4.2%
· The Group has comfortable headroom to LTV and ICR covenant levels
within each facility at covenant levels at 31 March 2023 and at
post-refinancing pro-forma covenant levels
· The total weighted average cost of drawn debt across all
facilities post refinancing is capped at 4.7% over the next three-year period
· No breaches of loan covenants during the forecast going concern
period
Defensive and diversified portfolio that is 100% let or pre-let on long leases
to strong tenant covenants
· The Group's portfolio is 100% let or pre-let to over 80 strong
tenants, across 13 sub-sectors. Furthermore, the tenants are the main trading
or parent companies within the tenant groups with strong financial covenants
· The Group draws comfort from the financial robustness of the
major tenants and analysis and reports to the Board the financial covenants of
all tenants contributing to >2% of contracted rent roll on a quarterly
basis.
· The Group benefits from a secure income stream of leases with an
average 27 years to first break across the portfolio. Each lease is drawn on a
fully repairing and insuring basis - tenants are responsible for repair,
maintenance and outgoings, so there is no cost leakage for the Company
· 100% rent collected in the year from tenants
Strong liquidity
· At 31 March 2023 the Group had net assets of £2.1bn (31 March
2022: £1.3bn) and a cash balance of £74.4m (31 March 2022: £72.5m),
including secured cash of £29.1m
· Post balance sheet date, the Group completed the refinancing of
various facilities that were due to expire in the near term resulting in total
borrowings of £1,298.6m
Virtually all rent has inflation-protection, through indexed or fixed uplifts,
providing substantial protection and the opportunity to generate rental growth
in a high inflationary environment
Debt maturity
Post refinancing, the Group has a 6-year weighted average term to maturity
with no debt maturing within 12 months of the approval date of the financial
statements. The next refinancing event relates to the £60m HSBC leisure
facility which falls due in December 2024. The Group's financial projections
show there are sufficient funds for the facility to be repaid in full from
free cash. The next large refinancing event following is in October 2025 and
relates to the £293m AIG healthcare facility and represents 23% of the total
post refinancing committed debt.
LXi REIT plc Company
Although the Company has net current liabilities, there are sufficient
distributable reserves to cover the final dividend for the 12m to 31 March
2023.
Although the intercompany debt within the PLC is classed as non-current, this
debt is technically due on demand the sub groups have sufficient equity to
repay these liabilities.
Going concern statement
The Board have considered the period to 30 June 2024 for the going concern
assessment. Based on the considerations above and on stress tests and reverse
stress tests, the Board believes that the Group and the Company have the
ability to continue in business for at least twelve months from the date of
approval of these financial statements and therefore have adopted the going
concern basis in the preparation of this financial information.
Sensitivity analysis
Loan covenant reverse stress test
We have performed analysis to test the extent to which the valuation of our
current portfolio and rental income should have to fall (due to contractual
nature of income and lease length, this could only be the result of a tenant
default) in order to result in a breach in each facility for the debt profile
as at 31 March 2023 and the post refinancing debt profile. All facilities at
31 March 2023 have comfortable headroom to covenants, with the tightest LTV
covenant requiring a 31% reduction in value before a breach and the tightest
ICR covenant requiring a 40% loss of rent before a breach. This represents our
'reverse stress test' and shows at what point the Group would breach its
covenants.
We have also carried out a 'reverse stress test' on the current post
refinancing position which shows comfortable headroom to covenants, the
tightest LTV covenant requiring a 30% reduction in value before a breach and
the tightest ICR covenant requiring a 31% loss of rent before a breach. For
the facilities that contain cash trap covenants, the tightest covenant would
require a 30% reduction in value and a 27% loss of rent before a breach.
In the unlikely event portfolio valuations decrease by the amount required to
trigger a breach, the Group has a number of options available to rectify a
breach. These include revising dividend payments, considering a rights issue
and disposal of assets. Similarly, if rent reduced by an amount to trigger a
breach, the Group is able to cash cure with uncommitted cash from elsewhere in
the Group.
2. Significant accounting judgments, estimate and assumptions
In the application of the Group's accounting policies the Board is required to
make estimates and assumptions about the carrying amounts of assets and
liabilities that are not readily apparent from other sources. The estimates
and associated assumptions that have a significant risk of causing a material
adjustment to the carrying amounts of assets and liabilities within the next
financial year are outlined below:
Estimates:
· Valuation of investment properties (Note 8)
The market value of Investment property is determined by an independent
property valuation expert to be the estimated amount for which a property
should exchange on the date of the valuation in an arm's-length transaction.
The Group uses the valuations carried out by Knight Frank LLP (the
"Independent Valuer") as the fair value of its property portfolio. The
valuation is based upon assumptions including future rental income and the
appropriate capitalisation rate. The Independent Valuer makes reference to
market evidence of transaction prices for similar properties.
The Group's properties have been independently valued by its Independent
Valuer in accordance with the definitions published by the Royal Institute of
Chartered Surveyors ("RICS") Valuation - Professional Standards, January 2022,
Global and UK Editions (commonly known as the 'Red Book').
Investment properties under construction are financed by the Group where the
Group enters into contracts for the development of a pre-let property under a
funding agreement. All such contracts specify a fixed amount of consideration.
The Group does not expose itself to any speculative development risk as the
proposed building is pre-let to a tenant under an agreement for lease and the
Group enters into a fixed-price development agreement with the developer.
Investment properties under construction are initially recognised at cost
(including any associated costs), which reflect the Group's investments in the
assets. Subsequently, the assets are remeasured to fair value at each
reporting date. The fair value of investment properties under construction is
estimated as the capitalised income calculated by the Independent Valuer, less
any costs still payable in order to complete, which include an appropriate
developer's margin.
With respect to the consolidated financial statements, investment properties
are valued at their fair value at each reporting date in accordance with IFRS
13 which recognises a variety of fair value inputs depending upon the nature
of the investment. Given the bespoke nature of each of the Group's
investments, all of the Group's investment properties are included in Level 3.
Details of the nature of these inputs and sensitivity analysis is provided in
Note 8.
Judgments:
· Classification of lease arrangements - the Group as lessor (Note
15)
The Group has acquired investment property that is leased to tenants. In
considering the classification of lease arrangements, at inception of each
lease the Group considers the economic life of the asset compared with the
lease term and the present value of the minimum lease payments and any
residual value compared with the fair value and associated costs of acquiring
the asset as well as qualitative factors as indicators that may assert to the
risks and rewards of ownership having been substantially retained or
transferred. Based on evaluation the Group has determined that it retains all
the significant risks and rewards of ownership of its investment property and
accounts for the lease arrangements as operating leases.
· Lease term (Note 4)
In accordance with accounting standards, rental income is recognised on a
straight-line basis over the expected lease term. A judgement has to be made
by the Directors as to the expected term of each lease. The judgement involves
determining whether extension option clauses on certain leases will be
exercised. This judgement impacts the length of time over which lease
incentives are recognised. The key element of this judgement is whether the
Directors can be "reasonably certain" that any options in place to extend the
lease term will be exercised at the expiry of the current lease. The Directors
concluded that it was impossible to say with reasonable certainty that an
option will be exercised. The Directors concluded that lease terms should be
restricted to the initial length of the lease, or to the break date, except
where reversionary leases have already been executed or where options to
extend have already been exercised.
· Treatment of corporate acquisitions in the period (Note 27)
The Merger (the acquisition of the entire issued share capital of Secure
Income REIT plc) during the period has been treated as an asset acquisition
rather than a business combination and therefore is outside the scope of IFRS
3.
The Company acquired on a share for share basis, with a 25% cash alternative,
the shares of Secure Income REIT plc (the "target"). The target company was
solely the owner of investment properties complete with extant tenant
operating leases along with related cash and leverage and other associated
assets and working capital balances.
The target was a real estate investment trust which was managed by Prestbury
Investment Partners Limited (the "target adviser"). The management contract
with the target advisor made the target advisor responsible for the day to day
operations required to manage the property owned by the target.
Simultaneously on the Merger, the target advisor was acquired by the
Investment Advisor's group, and the management contract between Prestbury and
SIR plc was immediately cancelled as the operations of the Group were taken
over by LXi REIT Advisors Limited who remain Investment Advisor to the
enlarged group.
In making the judgement, the Directors considered whether the operations and
activities of Secure Income REIT plc (and not the target adviser), being the
entity acquired, constituted a business which they consider would require the
acquisition of inputs and processes, that are designed to create outputs.
The Directors consider that in order that a business would be capable of being
conducted and managed for the purposes defined above, an integrated set of
activities and assets requires two essential elements-inputs and the relevant
processes applied to those inputs, which together are or will be used to
create outputs.
The Directors consider that the Company itself being a passive investor in
'inputs' and thus possessing no 'processes', required to produce 'outputs'
mean that a business has not been acquired through the merger. The relevant
processes to create outputs are and remain those of the Investment Advisor.
The transaction has therefore been accounted for in the consolidated financial
statements as an asset acquisition. See Note 27 for detail.
3. Summary of significant accounting policies
The principal accounting policies applied in the preparation of the
consolidated financial statements are set out below. The policies have been
consistently applied.
· Basis of consolidation
The consolidated financial statements comprise the financial statements of the
Group as at the year end date.
Subsidiaries are all entities over which the Group has control. The Group
controls an entity when the Group is exposed to, or has rights to, variable
returns from its involvement with the entity and has the ability to affect
those returns through its power to direct the activities of the entity. All
intra-group transactions, balances, income and expenses are eliminated on
consolidation. The financial statements of the subsidiaries are included in
the consolidated financial statements from the date that control commences
until the date that control ceases.
On 6 July 2022 the Group completed a merger with Secure Income REIT Plc and
its subsidiaries, from which date the company's became a wholly owned
subsidiaries of the Group.
Accounting policies of the subsidiaries are consistent with the policies
adopted by the Company.
· Investment property
Investment property, which is property held to earn rentals and/or for capital
appreciation, is initially recognised at the point where conditions to the
purchase are substantially met and measured at cost, being the fair value of
the consideration given, including expenditure that is directly attributable
to the acquisition of the investment property. After initial recognition,
investment property is stated at its fair value at the reporting date. Gains
and losses arising from changes in the fair value of investment property are
included in the period in which they arise in the statement of comprehensive
income.
Investment properties under construction are financed by the Group where the
Group enters into contracts for the development of a pre-let property under a
funding agreement. All such contracts specify a fixed amount of consideration.
The Group does not expose itself to any speculative development risk as the
proposed building is pre-let to a tenant under an agreement for lease and the
Group enters into a fixed price development agreement with the developer.
Investment properties under construction are initially recognised at cost
(including any associated costs), which reflect the Group's investment in the
assets. Subsequently, the assets are remeasured to fair value at each
reporting date. The fair value of investment properties under construction is
estimated as the fair value of the completed asset less any costs still
payable in order to complete, which include an appropriate developer's margin.
During the period between initial investment and the rent commencement date,
the Group receives licence fee income from the developer. Licence fees
receivable by the Group in respect of the period are treated as discounts to
the cost of investment property. Any economic benefit of the licence fee is
recognised through the change in fair value of investment property.
When development completion is reached, the completed investment property is
transferred to the appropriate class of investment property at the fair value
at the date of practical completion so that any economic benefit of the
licence fee is appropriately reflected within investment property under
construction.
Subsequent expenditure is capitalised only when it is probable that future
economic benefits are associated with the expenditure. Ongoing repairs and
maintenance are expensed as incurred.
An investment property is derecognised upon disposal or when the investment
property is permanently withdrawn from use and no future economic benefits are
expected from the disposal. Any gain or loss arising on derecognition of the
property (calculated as the difference between the net disposal proceeds and
the carrying amount of the asset) is incurred in profit or loss in the period
in which the property is derecognised.
Deferred acquisition costs represent costs incurred on investment properties
which completed after the period end and will subsequently be capitalised.
Significant accounting judgments, estimates and assumptions made in the
valuation of investment properties are described in Note 2.
· Assets held for sale
An asset will be classified as held for sale in line with IFRS 5 Non-Current
Assets Held for Sale and Discontinued Operations, where there is Board
approval at the year-end date, the asset is available for immediate sale in
its current condition and the asset is expected to be disposed of within 12
months after the date of the Consolidated Statement of Financial Position.
· Financial instruments
a. Financial assets
The Group classifies its financial assets as fair value through profit or loss
or amortised cost, depending on the purpose for which the asset was acquired
and based on the business model test. There are no material financial assets
held at fair value through profit or loss. The Group's accounting policy for
financial assets classified as amortised cost is as follows:
Fair value through profit or loss
These are carried in the Statement of Financial Position at fair value with
changes in fair value recognised in the Statement of Comprehensive Income in
the finance income or expense line. The Group does not have any assets held
for trading nor does it voluntarily classify any financial assets as being at
fair value through profit or loss.
Amortised cost
These assets arise principally from the provision of goods and services to
customers (e.g. rent receivables), but also incorporate other types of
financial assets where the objective is to hold these assets in order to
collect contractual cash flows and contractual cash flows are solely payments
of principal and interest. They are initially recognised at fair value plus
transaction costs that are directly attributable to their acquisition or issue
and are subsequently carried at amortised cost being the effective interest
rate method, less provision for impairment.
Impairment provisions for receivables are recognised based on the simplified
approach within IFRS 9 using a provision matrix in the determination of the
lifetime expected credit losses. During this process the probability of the
non-payment of the rent receivables is assessed. This probability is then
multiplied by the amount of the expected loss arising from default to
determine the lifetime expected credit loss for the rent receivables. For rent
receivables, which are reported net, such provisions are recorded in a
separate provision account with the loss being recognised in the consolidated
statement of comprehensive income. On confirmation that the receivable will
not be collectable, the gross carrying value of the asset is written off
against the associated provision.
The Group's financial assets measured at amortised cost comprise rent
receivable, restricted cash and cash and cash equivalents in the consolidated
statement of financial position.
Cash and cash equivalents comprise cash in hand and deposits held at call with
banks. Cash and cash equivalents also includes cash held by lawyers for
subsequent completions.
Restricted cash represents cash withheld by the lender on drawdowns of
borrowings referred to in Note 14 until the certain security is provided to
release the funds as well as amounts withheld when a securitised asset is
disposed prior to the bank replacing the asset with adequate security and in
consequence, restricted cash does not form an integral part of the Group's
cash management as at the reporting date.
Interest rate derivatives
The Group has used interest rate derivatives to hedge its exposure to cash
flow interest rate risk. Derivatives are initially recognised at fair value
on the date on which the derivative contract is entered into and are
subsequently measured at fair value.
Derivatives are held at fair value through profit and loss.
b. Financial liabilities
The Group classifies its financial liabilities as fair value through profit or
loss, depending on the purpose for which the liability was acquired and based
on the business model test. There are no financial liabilities held at fair
value through profit or loss. The Group's accounting policy for financial
liabilities classified as other financial liabilities is as follows:
Other financial liabilities
Bank borrowings which are initially recognised at fair value net of any
transaction costs directly attributable to the issue of the instrument. Such
interest bearing liabilities are subsequently measured at amortised cost using
the effective interest rate method, which ensure that any interest expense
over the period to repayment is at a constant rate on the balance of the
liability carried in the Group Statement of Financial Position. For the
purposes of each financial liability, interest expense includes initial
transaction costs and any premium payable on redemption, as well as any
interest or coupon payment while the liability is outstanding.
In the event of a modification to the terms of a loan agreement, the Group
considers both the quantitative and qualitative impact of the changes. Where a
modification is considered substantial, the existing facility is treated as
settled and the new facility is recognised. Where the modification is not
considered substantial, the carrying value of the liability is restated to the
present value of the cash flows of the modified arrangement, discounted using
the effective interest rate of the original arrangement. The difference is
recognised as a gain or loss on refinancing through the statement of
comprehensive income.
Trade and other payables that are financial liabilities are initially
recognised at fair value. Where a financing component is identified in respect
of long term payables the fair value is calculated with reference to an
imputed interest rate and subsequently amortised using the effective interest
rate method. Short term financial liabilities are carried at their expected
settlement value.
· Fair value hierarchy
Level 1: Quoted (unadjusted) market prices in active markets for identical
assets or liabilities.
Level 2: Valuation techniques for which the lowest level input that is
significant to the fair value measurement is directly or indirectly
observable.
Level 3: Valuation techniques for which the lowest level input that is
significant to the fair value measurement is unobservable.
For assets and liabilities that are recognised in the financial statements on
a recurring basis, the Group determines whether transfers have occurred
between levels in the hierarchy by reassessing categorisation at the end of
each reporting period.
· Leases - the Group as lessor
Leases are classified as finance leases whenever the terms of the lease
transfer substantially all the risks and rewards of ownership to the lessee.
All other leases are classified as operating leases.
The Group has determined that it retains all the significant risks and rewards
of ownership of the properties and accounts for the contracts as operating
leases.
Properties leased out under operating leases are included in investment
property in the consolidated statement of financial position. Rental income
from operating leases is recognised on a straight line basis over the expected
term of the relevant leases.
For leases which contain fixed or minimum uplifts, the rental income arising
from such uplifts is recognised on a straight line basis over the lease term.
Tenant lease incentives are recognised as a reduction of rental income on a
straight line basis over the term of the lease. The Group recognises the
impact of the temporary rent reductions agreed to support tenants as as a
reduction of rental income on a straight line basis over the expected lease
term.
Sub-leases of leasehold properties are classified with reference to the right
of use asset arising from the head lease. All other leases are classified as
operating leases.
· Leases - the Group as lessee
All leases where the Group is a lessee are accounted for by recognising a
right-of-use asset and a lease liability, except for leases of low value
assets and leases with a term of 12 months or less.
Lease liabilities are measured at the present value of the lease payments of
ground rents due to the lessor over the lease term, with the discount rate
determined by reference to the rate inherent in the lease unless this is not
readily determinable, in which case the Group's incremental borrowing rate on
commencement of the lease is used. Subsequent to initial measurement, lease
liabilities increase as a result of interest charged at a constant rate on the
balance outstanding and are reduced for lease payments made.
Right-of-use assets are initially measured at the amount of the lease
liability, reduced for any tenant lease incentives received. As leasehold
properties meet the definition of investment property, the right-of-use assets
are presented within investment property and are subsequently measured at fair
value.
· Taxation
Taxation on the profit or loss for the period not exempt under UK REIT
regulations or otherwise, comprises current and deferred tax. Tax is
recognised in the consolidated statement of comprehensive income except to
the extent that it relates to items recognised as direct movement in equity,
in which case it is recognised as a direct movement in equity. Current tax is
expected tax payable on any non-REIT taxable income for the period, using tax
rates enacted or substantively enacted at the reporting date, and any
adjustment to tax payable in respect of previous periods.
Deferred tax is provided on temporary differences between the carrying amounts
of assets and liabilities for financial reporting purposes and the amounts
used for taxation purposes. The amount of deferred tax that is provided is
based on the expected manner of realisation or settlement of the carrying
amount of assets and liabilities, using tax rates enacted or substantively
enacted at the reporting date.
· Foreign currency translation
The results of Group undertakings with a functional currency other than
Sterling are translated into Sterling at the actual exchange rates prevailing
at the time of the transaction, unless the average rate for the reporting
period is not materially different from the actual rate, in which case that
average rate is used.
The gains or losses arising on the end of year translation of the net assets
of such Group undertakings at closing rates and the difference between
translating the results at average rates compared to the closing rates are
taken to other reserves. Monetary assets and liabilities denominated in
foreign currencies are translated into Sterling at the rates of exchange
ruling at the balance sheet date with any gains or losses arising on
translation recognised in the income statement.
· Dividends payable to shareholders
Dividends to the Company's shareholders are recognised as a reduction in
equity in the financial statements at the earlier of the date they are paid
and the date they are approved at the AGM.
· Finance income and finance costs
Finance income is recognised as interest accrues on cash balances held by the
Group. Finance costs consist of interest payable and loan arrangement fees
which are expensed using the effective interest rate method over the term of
the loan and other costs that the Group incurs in connection with bank and
other borrowings which are expensed in the period in which they occur.
Any finance costs that are separately identifiable and directly attributable
to the development of an investment property that takes a period of time to
complete are capitalised as part of the cost of the asset.
· Equity issue costs
The costs of issuing equity instruments are accounted for as a deduction from
equity.
4. Rental income
Year ended Year ended
31 March 2023 31 March 2022
£m £m
Rental income from investment property 160.4 48.6
Accretion of tenant lease incentives (Note 8) 37.8 9.9
Service charge income 4.1 -
Head rent income 1.2 -
203.5 58.5
5. Administrative and other expenses
Year ended Year ended
31 March 2023 31 March 2022
£m £m
Investment advisory fees (Note 21) 12.9 7.1
Legal and professional fees 1.4 0.5
Other administrative costs 1.0 0.6
Corporate administration fees 1.1 0.3
Fees paid to the Company's Independent Auditor 0.4 0.2
Directors' fees (Note 21) 0.4 0.3
Recruitment fees - 0.2
Advertising & Marketing 0.1 0.1
Abortive fees (Note 25) 1.5 -
18.8 9.3
Fees paid to the Company's Independent Auditor comprise the review of the
Interim Report, the audit of the Annual Report and the audit of the financial
statements of the Company's subsidiaries.
The Company paid £0.2m of additional fees to the Company's Independent
Auditor in the year. £0.1m in respect of interim services and £0.1m in
respect of reporting accountant services in the year relating to the merger
which have been recognised as capitalised transaction costs on acquisition of
the investment properties. (31 March 2022: £0.1m for interim services and
£0.1m for reporting accountant work).
6. Finance costs
Year ended Year ended
31 March 2023 31 March 2022
£m £m
Interest payable on bank borrowings 43.1 5.4
Amortisation of loan arrangement fees 6.1 1.2
Leasehold interest 4.6 0.2
Other bank charges 0.2 -
54.0 6.8
Capitalised finance costs are included within property acquisitions in Note 8.
The total interest payable on financial liabilities carried at amortised cost
comprised:
(i) the interest payable on bank borrowings totalling £43.7m of
which £0.6m was capitalised (31 March 2022: £6.5m of which £1.1m was
capitalised); and
(ii) the amortisation of loan arrangement fees totalling £6.1m of
which £nil was capitalised (31 March 2022: £1.2m of which £nil was
capitalised).
The capitalisation rate used to determine the amount of borrowing costs
eligible for capitalisation during the year was 2.95%pa (31 March 2022:
2.85%).
Loss on extinguishment of debt
During the year, the Company made a £20.6m make-whole payment on the early
repayment of the £232m Merlin A facility following the completion of the
Merlin 'income strip' sale, following which the related interest rate cap was
closed out for proceeds of £23.1m, representing a gain of £12.8m versus the
book value at 31 March 2022.
7. Taxation
The Group is a real estate investment trust ("REIT") and as a result the
profit and gains arising from the Group's property rental business are exempt
from UK corporation tax provided the Group meets certain conditions as set out
in the UK REIT regulations. Profits arising from any residual activities (e.g.
trading activities and interest income), after the utilisation of any
available residual tax losses, are subject to corporation tax at the main rate
of 19% for the year.
As a result of the Merger the Group acquired one German property and is now
subject to German corporation tax on its German property rental business at an
effective rate of 15.825%, resulting in a tax charge of £0.4m. A deferred tax
liability at acquisition of £11.0m was net off against the investment
property acquisition. Going forward deferred tax will be recognised for the
German capital gains tax that would potentially be payable on the sale of the
relevant investment properties.
The German tax assets have been subject to a routine tax audit by the German
tax authorities since January 2021. The current estimate of the tax liability
that might arise, including interest up to the balance sheet date but
excluding any penalties, is estimated at £0.6m and a provision has been made
to that extent.
Year ended Year ended
31 March 2023 31 March 2022
£m £m
Current tax - current year 0.4 (0.7)
Current tax - prior years 0.6 -
Total current tax 1.0 (0.7)
Tax charge/ (credit) 1.0 (0.7)
The tax credit in the prior year related to the release of a previously
over-accrued tax charge.
Reconciliation of the total tax charge
The reconciliation of profit before tax multiplied by the standard rate of
corporation tax for the year of 19% (31 March 2022: 19%) to the total tax
charge in the consolidated statement of comprehensive income is as follows:
Year ended Year ended
31 March 2023 31 March 2022
£m £m
(Loss)/profit before tax (287.1) 161.3
Tax at the standard rate of UK corporation tax of 19% (54.5) 30.6
Effects of:
REIT exempt income (21.1) (8.5)
Revaluation of investment properties 77.3 (22.4)
Valuation adjustment in fair value of derivative investments (4.2) -
Loss on disposal of investment properties 0.5 0.4
Residual losses brought forward as at 31 March 2021 - (0.4)
Residual losses not recognised as deferred tax asset 0.6 0.3
Realised loss on disposal of financial instruments 0.9 -
Exempt expenses not deductible for tax purposes 0.5 -
Local income tax expense 1.0 -
Reversal of overstated tax creditor - (0.7)
Tax charge 1.0 (0.7)
UK REIT exempt income includes property rental income that is exempt from UK
Corporation Tax in accordance with Part 12 of CTA 2010.
8. Investment property
Investment property long leasehold Investment property freehold Investment property in course of construction Total
£m £m £m £m
Year ended 31 March 2023
Balance at 1 April 2022 331.0 1,093.4 55.7 1,480.1
Property acquisitions 22.7 51.1 31.9 105.7
Property acquisitions relating to the merger of SIR plc 374.9 2,021.0 - 2,395.9
Licence fee receivable (Note 25) - - 0.2 0.2
Tenant lease incentives (Note 4) 11.7 26.1 - 37.8
Property disposals - (13.2) - (13.2)
Property reclassification Merlin income strip 596.5 (596.5) - -
Change in fair value (95.2) (288.9) (22.6) (406.7)
Currency translation - 3.2 - 3.2
Headlease movement (1.1) - - (1.1)
Assets transferred to held for sale (2.1) (30.2) - (32.3)
Transfers of completed property 10.4 24.7 (35.1) -
Balance at 31 March 2023 1,248.8 2,290.7 30.1 3,569.6
Year ended 31 March 2022
Balance at 1 April 2021 147.4 636.0 104.1 887.5
Property acquisitions 49.3 375.3 70.4 495.0
Licence fee receivable (Note 25) - - (3.6) (3.6)
Tenant lease incentives (Note 4) 2.1 7.3 0.5 9.9
Tenant lease contributions 0.9 - 0.9
Property disposals - (8.3) - (8.3)
Change in fair value 16.4 77.1 24.2 117.7
Assets transferred to held for sale (19.0) - (19.0)
Transfers of completed property 115.8 24.1 (139.9) -
Balance at 31 March 2022 331.0 1,093.4 55.7 1,480.1
The investment property has been independently valued at fair value by Knight
Frank LLP, the Independent Valuer who are accredited external valuers with
recognised and relevant professional qualifications and recent experience of
the location and category of the investment property being valued. The
valuations are the ultimate responsibility of the Board.
The Independent Valuer valued the entire property portfolio at £3,356.3m at
31 March 2023 (31 March 2022: £1,544.4m) including capital commitments on
forward funded assets. The valuation included a €161.7m valuation of the
German asset in the portfolio, the only asset held outside of the UK. This was
translated to GBP at a rate of €1: £0.88.
The corporate acquisition during the year has been treated as an asset
purchase rather than business combination as the transaction was considered to
be acquisition of property rather than a business.
The Group identifies the potential impact of climate-related risks on property
valuations as a principal risk as outlined in the Annual Report. The current
valuation of the property portfolio is not materially impacted by any
climate-related risks. We will continue to work closely with the Independent
Valuer to monitor how climate-related factors impact values in long-lease
property sector and of our individual asset valuations.
Reconciliation of fair value to total portfolio valuation
31 March 2023 31 March 2022
£m £m
Investment property at fair value 3,569.6 1,480.1
Assets held for sale at fair value 32.3 19.0
Capital commitments on forward funded assets (Note 24) 50.8 53.6
Vendor discount in respect of rent-free periods and top-ups 2.7 3.0
Licence fee receivable 1.0 1.5
Other financial liabilities (Note 15) (256.3) -
Leasehold liability (Note 15) (43.8) (12.8)
Total completed portfolio valuation 3,356.3 1,544.4
Capital commitments represent the costs to bring the asset to completion under
the funding agreements with the developers which includes a developer's
margin. These costs are not provided for in the statement of financial
position.
Vendor discounts in respect of rent-free periods and top-ups represent amounts
by which a purchase price was reduced by the vendor on acquisitions to cover
future rent-free periods or periods to the next rent review under the lease.
The total portfolio valuation assumes the property to be income generating
during the unexpired rent-free periods and passing rent to be the topped-up
rent during the unexpired period to next rent review and therefore includes
this income in the valuation.
Licence fee receivable represent amounts due from developers under funding
agreements that have not been settled at the period end. The valuation assumes
the property to be income generating throughout the period of development and
therefore includes this income in the valuation.
The valuation of investment property that is long leasehold where headlease
rents are material is grossed up to include the carrying value of the
leasehold liability. The treatment for the income strip follows the same
basis.
Investment property at fair value
Valuation Quoted prices in active markets Significant observable inputs Significant unobservable inputs Total
(Level 1) (Level 2) (Level 3)
£m £m £m £m
31 March 2023 - - 3,356.3 3,356.3
31 March 2022 - - 1,499.1 1,499.1
Investment property at fair value includes investment property held for sale.
There have been no transfers between levels during the year.
The valuations have been prepared in accordance with the RICS Valuation -
Professional Standards (incorporating the International Valuation Standards).
The determination of the fair value of investment property requires the use of
estimates such as future cash flows from assets (such as lettings, tenants'
profiles, future revenue streams, capital values of fixtures and fittings,
plant and machinery, any environmental matters and the overall repair and
condition of the property) and discount rates applicable to those assets.
The descriptions and definitions relating to valuation techniques and key
inputs made in determining fair values are as follows:
Valuation techniques
· Standing assets
Standing assets are valued using the investment valuation method. Using the
investment valuation method, the passing rent is divided by an appropriate
yield with a deduction of standard purchaser's costs. The method uses analysis
of appropriate comparable investments, rental and sale transactions, together
with evidence of demand within the vicinity of the subject property and of
properties of a similar nature. The yield applied takes into account the size,
location, terms, covenant strength and other material factors.
· Investment property in the course of construction
For property in the course of construction the fair value is calculated by
estimating the fair value of the completed property using the income
capitalisation technique less estimated costs to completion under fixed price
developer funding agreements which include an appropriate developer's margin.
Observable input: passing rent
The prevailing rent at which space is let at the date of valuation. Passing
rents are dependent upon a number of variables in relation to the Group's
property. These include property use, size, location, tenant covenant strength
and terms of the lease.
Unobservable input: rental growth
The estimated average increase in rent based on both market estimations and
contractual arrangements. A reduction of the estimated future rental growth in
the valuation model would lead to a decrease in the fair value of the
investment property and an inflation of the estimated future rental growth
would lead to an increase in the fair value. No quantitative sensitivity
analysis has been provided for estimated rental growth as a reasonable range
would not result in a significant movement in fair value.
Unobservable input: net initial yield
The net initial yield is defined as the initial gross income as a percentage
of the market value (or purchase price as appropriate) plus standard costs of
purchase.
Sector Passing rent pa Passing rent Valuation Valuation yield
31 March 2023(1) pa range(1) 31 March 2022(1) range(1)
£m £m £m %
Healthcare 45.2 0.0 - 9.4 916.9 4.1 - 7.7
Budget hotels 42.8 0.0 - 2.2 617.3 4.9 - 13.5
Theme parks 37.9 1.9 - 12.8 562.8 4.9 - 4.9
Foodstores 20.2 0.1 - 2.7 374.4 4.0 - 9.0
Industrial 13.3 0.2 - 3.7 260.7 4.2 - 7.5
Pubs 8.7 0.1 - 3.8 128.8 5.0 - 7.1
Arena 7.1 0.1 - 4.3 90.6 6.8 - 6.8
Car parks 4.5 0.1 - 1.1 70.6 5.3 - 6.4
Garden centres 3.2 0.4 - 1.0 53.2 5.5 - 5.9
Life sciences 2.9 2.9 - 2.9 53.9 5.0 - 5.0
Drive-thru coffee 2.7 0.1 - 0.2 39.4 4.6 - 6.1
Education 2.2 0.1 - 0.3 35.5 5.8 - 6.0
Other 11.5 0.0 - 1.8 152.2 5.1 - 9.1
Portfolio 202.2 0.0 - 12.8 3,356.3 4.0 - 13.5
Sector Passing rent pa Passing rent Valuation Valuation yield
31 March 2022(1) pa range(1) 31 March 2022(1) range(1)
£m £m £m %
Foodstores and essentials 16.3 0.1 - 2.7 386.3 3.3 - 7.5
Industrial 13.8 0.2 - 3.5 352.4 3.0 - 6.8
Hotel 10.4 0.1 - 1.8 212.6 4.1 - 6.5
Healthcare 6.3 0.0 - 1.0 110.4 5.0 - 6.4
Car parks 4.3 0.0 - 1.1 82.4 4.0 - 5.3
Garden Centre 2.1 0.3 - 0.9 43.3 4.6 - 4.6
Life sciences 2.9 2.9 - 2.9 59.8 4.5 - 4.5
Drive-thru coffee 2.5 0.0 - 0.1 38.6 4.0 - 5.8
Pubs 2.6 0.1 - 0.4 41.3 5.5 - 6.2
Education 1.9 0.0 - 0.1 34.8 5.0 - 5.0
Other 11.4 0.0 - 1.8 182.5 4.0 - 9.5
Portfolio 74.5 0.0 - 3.5 1,544.4 3.0 - 9.5
1 Excludes assets that had exchanged but not completed at the reporting date
Sensitivities of measurement of significant inputs
As set out within significant accounting estimates and judgments above, the
Group's property portfolio valuation is open to judgments and is inherently
subjective by nature. The table below shows the sensitivities of measurement
of the Group's investment property to certain inputs:
Valuation -5% in passing rent +5% in passing rent +25bps in net initial yield -25bps in net initial yield
£m £m £m £m
31 March 2023 (182.9) 182.9 (162.5) 178.3
31 March 2022 (60.8) 60.8 (64.9) 72.7
Realised gain on disposal of investment property
During the year, the Group disposed of certain of its investment properties.
The table below shows a reconciliation of the gain recognised on disposal
through the consolidated statement of comprehensive income and the realised
gain on disposals in the year which includes changes in fair value of the
investment property recognised in previous periods.
31 March 2023 31 March 2022
£m £m
Consideration received 29.5 8.3
Less:
Carrying value (32.1) (8.3)
Selling costs (0.2) -
(Loss)/gain on disposal of investment property (2.8) -
Add:
Change in fair value recognised in previous periods 3.6 2.1
Realised gain on disposal of investment property 0.8 2.1
9. Assets held for sale
31 March 2023 31 March 2022
£m £m
Assets held for sale 32.3
19.0
Assets held for sale relate to investment property for which there was board
approval to dispose of at the year end date and the intention is to dispose of
these assets within 12 months. Two properties are classified as held for sale
at the year end for which contracts have been exchanged to sell.
10. Financial instruments
Set out below is a comparison of the book value and fair value of the Group's
financial instruments where a difference exists. For all other financial
instruments, the book value is equal to the fair value.
Bank borrowings Book value Fair value
£m £m
31 March 2023 1,238.5 1,184.0
31 March 2022 240.0 237.1
Fair value is not the same as a liquidation valuation, the amount required to
prepay the loans at the balance sheet date, and therefore does not represent
an estimate of the cost to the Group of prepaying the debt before the
scheduled maturity date, which would be materially higher.
11. Trade and other receivables
31 March 2023 31 March 2022
£m £m
Recoverable VAT - 5.7
Licence fee receivable 2.9 5.3
Rent receivable 8.6 8.0
Rent deposit 2.8 -
Prepayments and other receivables 2.5 0.4
Amounts due within one year 16.8 19.4
The carrying value of trade and other receivables classified at amortised cost
approximates fair value.
The Group applies the IFRS 9 simplified approach to measuring expected credit
losses using a lifetime expected credit loss provision for trade receivables.
To measure expected credit losses on a collective basis, trade receivables are
grouped based on similar credit risk and ageing.
The expected loss rates are based on the Group's historical credit losses
experienced over the period from incorporation to 31 March 2023. The
historical loss rates are then adjusted for current and forward-looking
information on macroeconomic factors affecting the Group's customers. The
expected credit loss provision as at 31 March 2023 is £nil (31 March 2022:
£0.1m).
Trade and other receivables that are financial assets amount to £11.5m (31
March 2022: £13.3m) which comprises licence fee receivable and rent
receivable.
The following table sets out the maturity profile of trade and other
receivables that are financial assets:
31 March 2023 31 March 2022
£m £m
30 days or fewer 11.5 13.0
31 to 60 days - 0.1
61 to 90 days - 0.1
91 days or more - 0.1
Over one year - -
11.5 13.3
12. Cash reserves
31 March 2023 31 March 2022
£m £m
Cash at bank 43.6 26.0
Cash held by lawyers 1.7 46.5
Secured cash 29.1 -
Total cash and cash equivalents 74.4 72.5
Cash held by lawyers is money held in escrow for expenses expected to be
incurred in relation to investment properties pending completion. These funds
are available immediately on demand.
Secured cash is held in accounts over which the providers of secured debt have
fixed security. The Group is unable to access this cash until it is released
to free cash each quarter, which takes place after quarterly interest and loan
repayments have been made as long as the terms of the associated secured
facility are complied with.
There are times throughout the year when the Group has restricted cash. At the
year-end £nil was held as restricted cash (31 March 2022: £nil). Restricted
cash is money held in accounts to which the Group does not have immediate
access and as such do not form part of the Group's short-term cash management.
These amounts arise both when initially drawing on term-loans prior to the
bank taking adequate security and where a securitised asset is disposed prior
to the bank replacing the asset with adequate security.
13. Trade and other payables
31 March 2023 31 March 2022
£m £m
Accrued investment property costs 1.7 4.0
Deferred rental income 44.3 14.5
Accruals 6.5 0.4
Trade and other payables 22.3 17.9
Other financial liabilities 1.6 -
Leasehold liability 0.2 0.3
Retentions payable 1.5 1.5
VAT payable 4.5 -
Amounts due within one year 82.6 38.6
Leasehold liability 43.7 12.5
Other financial liabilities 254.7 -
Retentions payable 0.7 1.1
Amounts due in more than one year 299.1 13.6
Trade and other payables that are financial liabilities amount to £332.7m (31
March 2022: £37.7m) which comprises accrued investment property costs,
accruals, retentions, trade and other payables, the leasehold liability and
the other financial liability.
During the year, the Group entered into the sale of a 65-year income strip of
Alton Towers and Thorpe Park in October 2022 for £257m. The sale price
represented a net initial yield of 2.96% NIY on 30% of the annual rental
income. The structure comprised selling the freehold in the properties to a UK
institutional investor, with 999-year leases granted back to the Company
pursuant to which the Company pays an annual aggregate rent of £8.2m,
representing 30% of the annual rental income received from the tenant. The
Company can acquire the freehold back for £1 in year 65. The obligations in
relation to this transaction amount to £256.3m at the year end and the
balance is classified separately from leasehold liabilities as an other
financial liability. Of this balance £1.6m is due within one year and
£254.7m is due in more than one year.
14. Bank borrowings
Drawn Undrawn Total
£m £m £m
Year ended 31 March 2023
At beginning of the year 246.0 89.0 335.0
Book value of debt on SIR plc merger 826.1 - 826.1
New facilities 385.0 - 385.0
Drawdown of existing facilities 114.0 (114.0) -
Repayments (322.6) 88.0 (234.6)
Foreign currency translation 1.5 - 1.5
At end of the year 1,250.0 63.0 1,313.0
Less: unamortised loan arrangement fees (11.5) - (11.5)
1,238.5 63.0 1,301.5
Year ended 31 March 2022
At beginning of the year 192.3 77.7 270.0
New facilities - 65.0 65.0
Drawdowns 239.7 (239.7) -
Repayments (186.0) 186.0 -
At end of the year 246.0 89.0 335.0
Less: unamortised loan arrangement fees (6.0) - (6.0)
240.0 89.0 329.0
31 March 2023 31 March 2022
£000 £000
Current borrowings 512.9 -
Less: unamortised loan arrangement fees (4.2) -
Total current borrowings 508.7 -
Non current borrowings 737.1 246.0
Less: unamortised loan arrangement fees (7.3) (6.0)
Total non current borrowings 729.8 240.0
1,238.5 240.0
Maturity of bank borrowings
31 March 2023 31 March 2022
£000 £000
Repayable within 1 year 512.9 -
Repayable between 1 and 2 years 215.0 -
Repayable between 2 and 5 years 352.1 74.6
Repayable after 5 years 170.0 165.4
1,250.0 240.0
The Group's borrowings comprise the following:
Scottish Widows Term Loan Facilities
· A fixed rate, interest only loan facility of £55.0m. The
facility has an all-in rate of 2.74% pa, for the duration of the loan term and
is due for repayment in December 2033
· A fixed rate, interest only loan facility of £40.0m. The
facility has an all-in rate of 2.74% pa, for the duration of the loan term and
is due for repayment in December 2033
· A fixed rate, interest only loan facility of £75.0m. The
facility has a fixed all-in rate payable of 2.99% pa, for the duration of the
loan term and is due for repayment in December 2033
Other secured loans
· A SONIA linked floating rate 'Leisure' facility with HSBC Plc of
£60.0m which was extended on 1 March for repayment in December 2024. The loan
has a margin of 2.05% is fixed at an all-in rate of 4.55% using an interest
rate cap.
· A fixed rate, interest only 'Budget hotels 1' facility of £59.0m
with M&G. The facility has a fixed all-in rate payable of 2.71% pa, for
the duration of the loan term and is due for repayment in October 2023. This
was repaid following the Group refinancing post year-end.
· A mixed rate, interest only 'Budget hotels 2' facility with
M&G of £65.4m, £52.2m of which is fixed at an all-in rate of 3.25% pa
and £13.2m is SONIA linked with a margin of 2.32%. The Group uses interest
rate derivatives to cap the interest on the floating elements of the facility
at a total of 3.75%. The loan is due for repayment in April 2023. This was
repaid following the Group refinancing post year-end.
· A EURIBOR linked floating rate 'Merlin B' facility with
Blackstone of €60.2m. The facility has a margin of 3.45%, is capped at an
all-in rate of 4.95% pa and is due for repayment in March 2025. The loan has
two one-year extension options. This was repaid following the Group
refinancing post year-end.
· A SONIA linked floating rate 'Merlin A' facility with Blackstone
of £232.0m. The facility has a margin of 3.45%, is capped at an all-in rate
of 4.95% and was due for repayment in March 2025. Following the completion of
the disposal of the Merlin 'income strip', the facility was repaid in full and
the cap sold. As part of this repayment, we paid £20.6m of early repayment
charges, following which the related interest rate cap was closed-out for
proceeds of £23.1m, representing a gain of £12.8m versus the book value at
31 March 2022. See Note 6 for more detail.
· A fixed rate amortising loan 'Healthcare 1' facility of £63.4m
with Legal and General. The facility has a fixed all-in rate payable of 4.29%
pa, for the duration of the loan term and is due for repayment in September
2025. Annual amortisation on the loan is £0.3m
· A fixed rate amortising 'Healthcare 2' facility of £294.9m with
AIG. The facility has a fixed all-in rate payable of 5.30% pa, for the
duration of the loan term and is due for repayment in October 2025. Annual
amortisation on the loan is £3.2m.
Revolving credit facility (Lloyds Bank plc and the Royal Bank of Scotland
International Ltd)
· A revolving credit facility of £165.0m (of which £100.0m was
drawn down as at 30 September 2022) with Lloyds and RBSi at a 1.55% margin
over SONIA maturing in August 2024. Group has traded interest rate derivatives
to cap the interest on the full facility at a total of 2.95%. This was repaid
following the Group refinancing post year-end.
Acquisition facility
· In May 2022 the Group entered into a £385.0m unsecured interest
only loan with Barclays Bank Plc and HSBC Plc in order to fund the Merger.
Interest on the loan increases by 25bps every quarter, from a starting point
of 1.5%. The rate payable as at 31 March 2023 1.75%. The loan is repayable in
May 2024 assuming two six-month extension options are exercised. This was
repaid following the Group refinancing post year-end.
The Group has remained compliant with the covenants throughout the period up
to the date of this report. The facilities are secured against respective
pools of the Group's investment property.
Reconciliation of liabilities to cash flows from financing activities
Year ended Year ended
31 March 2023 31 March 2022
£m £m
Bank borrowings, other financial liabilities and leasehold liability at start 252.8 190.4
of the year
Cash flows from financing activities
Bank borrowings drawn 499.0 239.7
Bank borrowings repaid (322.6) (186.0)
Other financial liability arising from income strip disposal 257.0 -
Loan arrangement fees paid (3.1) (1.4)
Non-cash movements
Amortisation of loan arrangement fees 6.1 1.1
Revaluation FX on loan 1.4 -
Bank debt acquired on SIR plc merger at fair value on acquisition 817.8 -
Amortisation of headlease present value 0.7
Increase in leasehold liability resulting from property acquisitions 29.6 9.0
Bank borrowings and other financial liability at the end of the year 1,538.7 252.8
15. Leasehold liabilities
Headlease obligations in respect of amounts payable on leasehold properties
are as follows;
31 March 2023 31 March 2022
Minimum headlease payments £m £m
Within one year 2.3 0.3
Between one and five years 9.2 1.3
More than five years 196.0 36.6
Less future finance charges (163.6) (25.4)
43.9 12.8
The earliest expiry date of all the headlease obligations is in more than five
years. £1.5m (2022: £nil) of the minimum headlease payments due within one
year are recoverable from occupational tenants.
The Group's accounting policy for headleases is disclosed in Note 3.
The leasehold liabilities relate to where the Group has long term leasehold
properties and under the leasehold agreement is required to pay the freeholder
rent. These total £43.9m and are reflected on the face of the Statement of
Financial Position. Of this balance £0.2m due in less than one year and
£43.7m is due in more than one year. The leasehold assets are held within
investment property see Note 8. The lease terms are generally fixed rent
payable, subject to periodic CPI or RPI uplifts.
16. Interest rate derivatives
To mitigate the interest rate risk that arises as a result of entering into
variable rate loans, the Group has entered into a number of interest rate
derivatives. A number of interest rate caps and one interest rate swap have
been taken out in respect of the Group's variable rate debt to fix or cap the
rate to which compounded SONIA can rise.
Year ended Year ended
31 March 2023 31 March 2022
£m £m
Current Assets - Derivative financial instruments 3.1 1.2
Non-current Assets - Derivative financial instruments 29.3 -
32.4 1.2
The interest rate derivatives are valued by the relevant counterparty banks on
a quarterly basis in accordance with IFRS 9. Any movement in the
mark-to-market values of the derivatives are taken to the Group profit or
loss.
Year ended Year ended
31 March 2023 31 March 2022
£m £m
Interest rate derivative valuation brought forward 1.2 -
Derivatives acquired on merger 12.4 -
Premium paid 26.5 0.1
Disposals (27.7) -
Amounts received on interest rate derivatives held at fair value through (2.2) -
profit and loss
Changes in fair value of interest rate derivatives 22.2 1.1
32.4 1.2
Fair value hierarchy
The fair value of Group's interest rate derivatives is recorded in the Group
Statement of Financial Position and is determined by forming an expectation
that interest rates will exceed strike rates and discounting these future cash
flows at the prevailing market rates as at the year end.
This valuation technique falls within Level 2 of the fair value hierarchy as
defined by IFRS 13. There have been no transfers between Level 1 and Level 2
during any of the years, nor have there been any transfers between Level 2 and
Level 3 during any of the years.
17. Reserves
Share capital
Shares of £0.01 each 31 March 2023 31 March 2023 31 March 2022 31 March 2022
No. (million) £m No. (million) £m
At the beginning of the year 911.6 9.1 621.8 6.2
Issued during the year 802.9 8.0 289.8 2.9
At the end of the year 1,714.5 17.1 911.6 9.1
Issued and fully paid 1,714.5 17.1 911.6 9.1
In the prior financial year, on 5 July 2021 the Company issued 78.0 million
ordinary shares at 133.0p per share (1p nominal value and a premium of 132.0p)
for total consideration of £104m.
In the prior financial year, on 7 January 2022 the Company issued 35.7 million
ordinary shares at 145.0p per share (1p nominal value and a premium of 144.0p)
as part consideration for the acquisition of a long-let property let to
Sainsbury's Supermarkets Ltd. The transaction had no profit or loss impact in
the year and there is no liability in respect of the transaction as at the
year end date. The remaining consideration was settled in cash. The
transaction was measured directly at the fair value of the assets and
liabilities acquired.
In the prior financial year, on 14 February 2022 the Company issued 176.1
million ordinary shares at 142.0p per share (1p nominal value and a premium of
141.0p) for total consideration of £250m.
On 7 July 2022 the Company issued 802.9 million ordinary shares at 143.4p per
share (1p nominal value and a premium of 142.4p). The shares were issued as
consideration for the acquisition of 100% of the issued share capital of SIR
plc along with a partial cash settlement. SIR plc shareholders were entitled
to receive 3.32 shares for each SIR plc share held, with the option to elect
to receive cash instead of some, or potentially all, of the shares to which
they would otherwise be entitled. The issue price of the shares reflects the
fair value of the assets acquired.
Share premium reserve
The share premium relates to amounts subscribed for share capital in excess of
nominal value net of directly attributable share issue costs.
Share premium reserve 31 March 2023 31 March 2022
£m £m
At the beginning of the year 940.0 544.5
Premium on issue of ordinary shares 1,180.8 402.6
Share issue costs - (7.1)
At the end of the year 2,120.8 940.0
Share issue costs relating to the merger have been capitalised see Note 27.
Foreign exchange reserve
Non-monetary assets and liabilities carried at fair value that are denominated
in foreign currencies are translated at the rates prevailing on the date that
the fair value was determined. Gains and losses arising on exchange are
included in the profit or loss for the year, except for exchange differences
arising on non-monetary assets and liabilities where the changes in fair value
are recognised directly to equity, and any exchange component of that gain and
loss is also recognised directly to equity.
Capital reduction reserve
In 2017, the Company by way of Special Resolution cancelled the then value of
its share premium account, by an Order of the High Court of Justice, Chancery
Division. As a result of this cancellation, £134.0m were transferred from the
share premium account into the capital reduction reserve account. The capital
reduction reserve account is classed as a distributable reserve.
Movements in the current year relate to dividends paid.
Retained earnings
Retained earnings relates to all net gains and losses not recognised
elsewhere.
Note although the Group has negative retained earnings at the year-end due to
the downward revaluation in property, the Company still has a large amount of
distributable reserves. At our AGM we will seek to cancel the share premium of
the Group to create even further headroom.
18. Dividends
Dividends paid and declared £m
Dividends in respect of the year ended 31 March 2022
Fourth quarterly dividend at 1.50p per share 13.6
Dividends in respect of the year ended 31 March 2023
First quarterly dividend at 1.575p per share 27.0
Second quarterly dividend at 1.575p per share 27.0
Third quarterly dividend at 1.575p per share 27.0
Total dividends paid 94.6
Total dividend per share paid in the year 6.225p
Total dividend per share proposed in respect of the year 6.3p
Dividends in respect of the year ended 31 March 2023
On 22 September 2022, the Company announced a first quarterly dividend in
respect of the year ended 31 March 2023 of 1.575p per share which was paid on
18 November 2022 to shareholders on the register on 30 September 2022.
On 24 November 2022, the Company announced a second quarterly dividend in
respect of the year ended 31 March 2023 of 1.575p per share which will be paid
on 4 January 2023 to shareholders on the register at 2 December 2022.
On 9 February 2023, the Company announced a third quarterly dividend in
respect of the year ended 31 March 2023 of 1.575p per share which was paid on
10 March 2023 to shareholders on the register on 16 February.
On 6 June 2023 the Board approved a fourth quarterly dividend in respect of
the year ended 31 March 2023 of 1.575 pence per share, payable on 7 July 2023
to shareholders on the register at 16 June 2023. The ex-dividend date will be
15 June 2023.
Dividends paid and declared in the prior year £m
Dividends in respect of the year ended 31 March 2021
Fourth quarterly dividend at 1.46p per share 9.1
Dividends in respect of the year ended 31 March 2022
First quarterly dividend at 1.50p per share 10.5
Second quarterly at 1.50p per share 10.5
Third quarterly dividend at 1.50p per share 11.0
Total dividends paid 41.1
Total dividend per share paid in the year 5.96p
Total dividend per share proposed in respect of the year 6.0p
Dividends in respect of the year ended 31 March 2022
On 17 September 2021, the Company announced a first quarterly dividend in
respect of the year ended 31 March 2022 of 1.50p per share which was paid on
29 October 2021 to shareholders on the register on 1 October 2021.
On 24 November 2021, the Company announced a second quarterly dividend in
respect of the year ended 31 March 2022 of 1.50p per share which was paid on
30 December 2021 to shareholders on the register on 3 December 2021.
On 28 January 2022, the Company announced a third quarterly dividend in
respect of the year ended 31 March 2022 of 1.50p per share which was paid on
25 March 2022 to shareholders on the register on 11 February 2022.
On 19 May 2022, the Company announced a final dividend in respect of the year
ended 31 March 2022 of 1.50p per ordinary share, which was paid on 24 June
2022 to shareholders on the register at the close of business on 27 May 2022.
19. Leases
The Group as lessor
The future minimum lease receivable by the Group under non-cancellable
operating leases are as follows:
Lease receivables < 1 year 1-5 years > 5 years Total
£m £m £m £m
31 March 2023 197.1 825.1 6,090.1 7,112.3
31 March 2022 68.2 281.8 1,288.5 1,638.5
An overview of the Group's leasing activities is given in the Investment
Advisors Report.
The Group as lessee
The following table sets out a maturity analysis of lease payments, showing
the undiscounted lease payments to be paid after the reporting date:
Lease payables < 1 year 1-5 years > 5 years Total
£m £m £m £m
31 March 2023 2.3 9.2 196.0 207.5
31 March 2022 0.3 1.3 36.6 38.2
The above is in respect of leasehold properties held by the Group. There are
194 properties (2022: 37) held under leasehold with lease ranges from 99 years
to 999 years.
The Group's leasing arrangements with lessors are headlease arrangements on
land and buildings that have been sub-let under the Group's normal leasing
arrangements (see above) to tenants. The Group carries its interest in these
headlease arrangements as long leasehold investment property (Note 8).
20. Segmental information
Operating segments are identified on the basis of internal financial reports
about components of the Group that are regularly reviewed by the chief
operating decision maker (which in the Group's case is the Board, comprising
the non-executive Directors, and the Investment Advisor) in order to allocate
resources to the segments and to assess their performance.
The internal financial reports contain financial information at a Group level
as a whole and there are no reconciling items between the results contained in
these reports and the amounts reported in the consolidated financial
statements. These internal financial reports include the IFRS figures but also
report the non-IFRS figures for the EPRA and alternative performance measures
as disclosed in Notes 24 and 25 and the Additional Information.
The Group's property portfolio comprises investment property, diversified
across 13 different property sub-sectors. The Board considers that all the
properties have similar economic characteristics. Therefore, in the view of
the Board, there is one reportable segment.
The geographical split of revenue and material applicable non-current assets
was:
Revenue
31 March 2023 31 March 2022
£m
£m
UK 187.0 58.5
Germany 16.5 -
203.5 58.5
Investment properties
31 March 2023 31 March 2022
£m
£m
UK 3,427.3 1,480.1
Germany 142.3 -
3,569.6 1,480.1
During the year the Group had three tenants (31 March 2022: Nil) that are
considered major customers, contributing more than 10% of the Group's
contractual annual passing rent per tenant. The Group's turnover is allocated
to major customers as follows:
Revenue excluding tenant lease incentives
31 March 2023 31 March 2022
£m
£m
Major customers 51% 81.9 - -
Other tenants (each less than 10%) 49% 78.5 100% 48.6
Rental income from investment property (Note 4) 100% 160.4 100% 48.6
21. Related party transactions
Transactions with the Board of Directors
In respect of the year ended 31 March 2023 there were £0.4m fees payable to
the Directors (31 March 2022: £0.3m) in the form of short-term employee
benefits. Employers NI contributions were nil in the year (31 March 2022:
nil).
The following table summarises the number of ordinary shares purchased during
the year by Directors and the number of ordinary shares held at 31 March 2023:
31 March 2023 31 March 2022
Number Number
Cyrus Ardalan (appointed 13 January 2022) Acquired - 206,000
Held 206,000 206,000
John Cartwright* Acquired - -
Held 66,687 66,687
Jan Etherden (resigned 15 July 2022) Acquired - -
Held 77,274 77,274
Patricia Dimond (resigned 19 July 2022)** Acquired - 14,084
Held 39,520 39,520
Hugh Seaborn (appointed 13 January 2022) Acquired 40,595 -
Held 40,595 -
Ismat Levin (appointed 13 January 2022) Acquired - 14,084
Held 14,084 14,084
Nick Leslau (appointed 6 July 2022)* Converted on merger 95,978,407 -
Held 95,978,407 -
Sandy Gumm (appointed 6 July 2022) Converted on merger 639,345 -
Held 639,345 -
* Includes companies wholly owned and persons closely associated (as defined
by the UK Market Abuse Regulation) with the Director.
** Includes persons closely associated (as defined by the UK Market Abuse
Regulation) with the Director
None of the Directors sold any shares in the Company during the year.
Transactions with the Investment Advisor
A fee of £12.9m was payable to the Investment Advisor in respect of the year
(31 March 2022: £7.1m). At 31 March 2023, £1.2m was due to the Investment
Advisor (31 March 2022: £0.9m) for provision of key management services.
The investment advisory fee is calculated in arrears in respect of each month,
in each case based upon the average market capitalisation of the Company on
the following basis:
· One-twelfth of 0.75% per calendar month of market
capitalisation up to or equal to £500m;
· One-twelfth of 0.65% per calendar month of market
capitalisation between £500m and £2.0bn; and;
· One-twelfth of 0.55% per calendar month of market
capitalisation above £2bn.
No performance fee is payable to the Investment Advisor.
The previous fee structure which applied up until 7 July 2022 is as follows:
· One-twelfth of 0.75% per calendar month of market
capitalisation up to or equal to £500m; and
· One-twelfth of 0.65% per calendar month of market
capitalisation above £500m.
No performance fee is payable to the Investment Advisor.
After the year end the Directors became aware that certain dividends paid
since the Merger had been made otherwise than in accordance with the Companies
Act 2006 as the relevant accounts of the Company did not show distributable
reserves at the time of payment.
The affected dividends are the interim dividend of 1.575 pence per Ordinary
Share for the quarter ended 30 June 2022 (paid on 18 November 2022), the
interim dividend of 1.575 pence per Ordinary Share for the quarter ended 30
September 2022 (paid on 4 January 2023) and the interim dividend of 1.575
pence per Ordinary Share for the quarter ended 31 December 2022 (paid on 10
March 2023) (the "Relevant Dividends").
Under the Companies Act 2006, a public company can only pay a dividend out of
its distributable profits as shown in its "relevant accounts". Although there
were sufficient profits and other distributable reserves within the Company's
group to pay the Relevant Dividends at each payment date, the relevant
accounts of the Company (being the accounts for the year ended 31 March 2022)
did not show sufficient distributable reserves and the payment of the
Relevant Dividends therefore constitutes a procedural breach of the Companies
Act 2006.
At the time of the distribution, the shareholders did not know, nor had
reasonable grounds for believing, that the distribution was in contravention
of the Companies Act 2006. As the Company has taken action to remedy the
situation, the payments in the year continue to be recognised as a dividend
payment as opposed to a receivable from shareholders.
At the forthcoming AGM of the Company's shareholders a special resolution will
be proposed to remedy this issue, including authorising the appropriation of
distributable profits to the payment of the relevant dividends and removing
any right for the Company to pursue its shareholders or directors for
repayment of those dividends. The overall effect of this resolution being
passed will be to return all parties (so far as possible) to the position they
would have been had the Relevant Dividends been made in full compliance with
the Companies Act 2006. The removal of any right for the Company to pursue its
directors for repayment of the Relevant Dividends constitutes a related party
transaction under IAS 24 and, for the purposes of the UK Listing Rules, a
smaller related party transaction under Listing Rule 11.1.10R.
22. Consolidated entities
The Company owns 100% of the equity shares of all subsidiaries listed below
and has the power to appoint and remove the majority of the Board of Directors
of those subsidiaries. The relevant activities of the below subsidiaries are
determined by the respective Directors based on simple majority votes.
Therefore, the Board of the Company has concluded that the Company has control
over all these entities and all these entities have been consolidated within
this set of financial statements.
Name of entity Principal activity Country of incorporation Ownership
LXi Property Holdings 1 Limited Property investment UK 100%
LXi Property Holdings 2 Limited(1) Property investment UK 100%
LXi Property Holdings 3 Limited Property investment UK 100%
LXi Property Holdings 4 Limited Property investment UK 100%
LXi Property Holdings 4a Limited* Property investment UK 100%
Alco 1 Limited(1) Property investment UK 100%
FPI Co 223 Limited(1) Property investment UK 100%
LXi Cowdenbeath Limited(1) Property investment UK 100%
SM Plymouth Hotel Limited(1) Property investment UK 100%
Corby (General Partner) Limited(1) Property investment UK 100%
Corby Rail Services Limited(1) Property investment UK 100%
Corby Limited Partnership(1) Property investment UK 100%
Firethorn Glasgow Limited (2) Property investment UK 100%
Corby (No.2) Unit Trust(1) Property investment Jersey 100%
Grove Asset 8 S.A.R.L. (1) Property investment Luxembourg 100%
LXi Spirit Limited Property investment Isle of Man 100%
Welling Property Limited Property investment BVI 100%
LXi Property Holdings 5 Limited Property investment UK 100%
LXi Property Holdings 5a Limited(1) Property investment UK 100%
Acquired in the period:
LXi Finco Limited(2) Intermediate parent company UK 100%
LXi Cornbow Limited Property investment UK 100%
LXi SIR Holdco Limited (previously Secure Income REIT Plc) (2) Intermediate parent company UK 100%
SIR Theme Park Subholdco Limited(1) Intermediate parent company UK 100%
SIR ATH Limited(1) Property investment UK 100%
SIR ATP Limited(1) Property investment UK 100%
SIR HP Limited(1) Property investment and borrower (incorporated in England, operating in UK 100%
Germany)
SIR TP Limited(1) Property investment UK 100%
SIR WC Limited(1) Property investment UK 100%
SIR Hospital Holdings Limited(1,2) Intermediate parent company UK 100%
SIR Umbrella Limited(1,2) Intermediate parent company UK 100%
SIR Hospitals Propco Limited(1,2) Intermediate parent company UK 100%
SIR Duchy Limited(1,2) Property investment UK 100%
SIR Springfield Limited(1,2) Property investment UK 100%
SIR Healthcare 1 Limited(1,2) Intermediate parent company UK 100%
SIR Healthcare 2 Limited(1,2) Intermediate parent company UK 100%
SIR Fitzwilliam Limited(1,2) Property investment UK 100%
SIR Fulwood Limited(1,2) Property investment UK 100%
SIR Lisson Limited(1,2) Property investment UK 100%
SIR Midlands Limited(1,2) Property investment UK 100%
SIR Oaklands Limited(1,2) Property investment UK 100%
SIR Oaks Limited(1,2) Property investment UK 100%
SIR Pinehill Limited(1,2) Property investment UK 100%
SIR Rivers Limited(1,2) Property investment UK 100%
SIR Woodland Limited(1,2) Property investment UK 100%
SIR Yorkshire Limited(1,2) Property investment UK 100%
Thomas Rivers Limited(1,2) Property investment UK 100%
SIR Hotels 1 Limited(1,2) Intermediate parent company UK 100%
SIR Hotels Jersey Limited(1) Intermediate parent company Jersey 100%
SIR Unitholder 1 Limited(1) Intermediate parent company Jersey 100%
SIR Unitholder 2 Limited(1) Intermediate parent company Jersey 100%
Grove Property Unit Trust 6(1) Property investment and borrower Jersey 100%
Grove Property Unit Trust 7(1) Property investment and borrower Jersey 100%
Grove Property Unit Trust 9(1) Property investment and borrower Jersey 100%
Grove Property Unit Trust 11(1) Property investment and borrower Jersey 100%
Grove Property Unit Trust 12(1) Property investment and borrower Jersey 100%
Grove Property Unit Trust 16(1) Property investment and borrower Jersey 100%
SIR Hotels 2 Limited(1,2) Intermediate parent company UK 100%
SIR Hotels Jersey 2 Limited(1) Intermediate parent company and property investment
Jersey 100%
SIR Unitholder 3 Limited(1) Intermediate parent company Jersey 100%
SIR Unitholder 4 Limited(1) Intermediate parent company Jersey 100%
Grove Property Unit Trust 2(1) Property investment and borrower Jersey 100%
Grove Property Unit Trust 5(1) Property investment and borrower Jersey 100%
Grove Property Unit Trust 13(1) Property investment and borrower Jersey 100%
Grove Property Unit Trust 14(1) Property investment and borrower Jersey 100%
Grove Property Unit Trust 15(1) Property investment and borrower Jersey 100%
SIR Maple 4 Limited(1) Property investment and borrower UK 100%
SIR Maple Holdco Limited(1,2) Intermediate parent company UK 100%
SIR Maple 1 Limited(1,2) Intermediate parent company UK 100%
SIR Unitholder 5 Limited(1) Intermediate parent company Jersey 100%
MIF 1 Unit Trust(1) Property investment and borrower Jersey 100%
SIR Maple 2 Limited(1,2) Property investment and borrower UK 100%
SIR Maple 3 Limited(1,2) Property investment and borrower UK 100%
SIR New Hall Limited(1,2) Dormant UK 100%
SIR MTL Limited(1,2) Dormant UK 100%
Charcoal Bidco Limited(1,2) Dormant UK 100%
SIR Hotels 2 Holdco Limited(1) Dormant Jersey 100%
SIR Hotels 2 GP Limited(1) Dormant Jersey 100%
SIR Hotels 2 Nominee Limited(1) Dormant Jersey 100%
SIR Newco Limited(1) Dormant UK 100%
SIR Newco 2 Limited(1) Dormant UK 100%
Newly incorporated in the period
LXi Property Holdings 6 Limited Property investment UK 100%
LXi Finco 1 Limited(1,2) Dormant UK 100%
LXi Holdco 1 Limited(2) Dormant UK 100%
LXi Finco 2 Limited(1,2) Dormant UK 100%
LXi Holdco 2Limited(2) Dormant UK 100%
1 Subsidiaries indirectly owned.
2 These subsidiary undertakings are taking advantage of the exemption from
audit under section 479a of the Companies Act 2006 and as a result LXi REIT
Plc will provide a statutory guarantee for any outstanding liabilities of
these undertakings as at 31 March 2023, all of which have been included in
these consolidated financial statements.
The registered office for UK subsidiaries is 8th Floor, 100 Bishopsgate,
London, EC2N 4AG.
The registered office of Jersey subsidiaries is 26 New Street St Helier Jersey
JE2 3RA.
The registered office of Luxembourg subsidiaries is 2 rue du Fosse, L-1536,
Luxembourg.
The registered office for BVI (British Virgin Islands) subsidiaries is
Wickhams CAY II, Tortola, British Virgin Islands, VG 1110.
The registered office of Isle of Man subsidiaries is First Names House,
Victoria Road, Douglas, IM2 4DF.
23. Financial risk management
The Group is exposed to interest rate risk, credit risk and liquidity risk in
the current and future periods. The Board of Directors oversees the management
of these risks. The policies of the Directors for managing each of these risks
are summarised below.
· Interest rate risk
Interest rate risk is the risk that the fair value or future cash flows of a
financial instrument will fluctuate because of changes in market interest
rates.
The Group has reduced the interest rate risk on its external borrowing by
fixing the rate of interest payable.
· Credit risk
Credit risk is the risk that a counterparty will not meet its obligations
under a financial instrument or customer contract, leading to a financial
loss. The Group will be exposed to credit risk on both its leasing activities
and financing activities, including deposits with banks and financial
institutions.
Credit risk related to financial instruments and cash deposits
One of the principal credit risks of the Group arises with the banks and
financial institutions. The Board of Directors believes that the credit risk
on short term deposits and current account cash balances is limited because of
low counterparty risk, the counterparties being banks with high credit
ratings.
All financial assets are regularly monitored. The maximum exposure to credit
risk at the reporting date is the carrying value of financial assets disclosed
in Note 11.
Credit risk related to leasing activities
In respect of occupational leasing arrangements, in the event of a default by
a tenant, the Group may suffer a void period where no rents are received and
incur additional re-letting costs. The quality of the tenant is assessed based
on an extensive tenant covenant review scorecard prior to acquisition of the
property. The assessment of the tenant credit worthiness is also monitored on
an ongoing basis. Credit risk is assisted by the vast majority of occupational
leases requiring that tenants pay rentals in advance. The Investment Advisor
monitors the rent collection in order to anticipate and minimise the impact of
defaults by tenants. Outstanding rent receivables are regularly monitored. The
Group defines default as a tenant being unable to make the required payments
on their rental obligations. Rent collection statistics are benchmarked in
internal reports to identify any problems at any early stage, and if necessary
and where possible (in the absence, for example, of a Government imposed
moratorium on the enforcement of rent collection) rigorous credit control
procedures are applied to facilitate the recovery of trade receivables.
· Liquidity risk
The Group manages its liquidity and funding risks by considering cash flow
forecasts and ensuring sufficient cash balances are held within the Group to
meet future needs. Prudent liquidity risk management implies maintaining
sufficient cash and marketable securities, the availability of financing
through appropriate and adequate credit lines, and the ability of customers to
settle obligations within normal terms of credit. The Group ensures, through
forecasting of capital requirements, that adequate cash is available.
The following table details the Group's liquidity analysis in respect of its
financial liabilities on contractual undiscounted payments:
< 3 months 3-12 1-5 > 5 Total
months years years
£m £m £m £m £m
31 March 2023
Financial liabilities
Bank borrowings (Note 14) 451.3 61.6 567.1 170.0 1,250.0
Interest payable on bank borrowings 9.8 22.6 51.5 27.7 111.6
Trade and other payables 30.5 - - - 30.5
Lease payables 0.6 1.7 9.2 196.0 207.5
Other financial liability 2.1 6.2 32.8 488.5 529.6
Retentions payable 0.7 0.2 0.7 - 1.6
495.0 92.3 661.3 882.2 2,130.8
31 March 2022
Financial liabilities
Bank borrowings (Note 14) - - 76.0 170.0 246.0
Interest payable on bank borrowings 1.5 4.4 19.7 32.5 58.1
Trade and other payables 17.9 - - - 17.9
Lease payables 0.1 0.2 1.3 36.6 38.2
Retentions payable - 1.5 1.1 - 2.6
19.5 6.1 98.1 239.1 362.8
As at 31 March 2023 there are a large level of bank borrowings which are due
in the next 12 months, which if not refinanced would have a material impact on
the Group. The Group was undertaking detailed discussions around the balance
sheet date with lenders with regard to refinancing these liabilities. On 25
April 2023 the Group announced these refinancing discussions were completed
and new facilities had been signed, resulting in a 6-year weighted average
term to maturity (excluding extension options). It also means that the
earliest refinancing event is now not until December 2024.
· Capital management
The Group's objectives when managing capital are to safeguard the Group's
ability to continue as a going concern in order to provide returns for
shareholders and to maintain an optimal capital structure to reduce the cost
of capital.
The Group considers proceeds from share issuance, bank borrowings and retained
earnings as capital. The Group's policy on borrowing is as set out below:
o The level of borrowing will be on a prudent basis for the asset class and
will seek to achieve a low cost of funds, whilst maintaining flexibility in
the underlying security requirements and structure of the Group.
o The Board intends to maintain a conservative level of aggregate borrowings
with a medium term maximum target of 30% of the Group's total assets.
The Group has remained compliant with all of its banking covenants during the
year and up to the date of this report.
Foreign currency exchange risk
The Group prepares its financial statements in Sterling. Following the Merger,
on an IFRS basis,4% by value of the Group's net assets are Euro denominated
and as a result the Group is subject to foreign currency exchange risk. On
an EPRA NTA basis, the Euro exposure is 4%. This risk is partially hedged
because within the Group's German operations, rental income, interest costs
and the majority of both assets and liabilities are Euro denominated. An
unhedged currency risk remains on the value of the Group's net investment in,
and net returns from, its German operations.
The Group's sensitivity to changes in foreign currency exchange rates,
calculated on the basis of a 10% increase in average and closing Sterling
rates against the Euro, was as follows, with a 10% decrease having the
opposite effect:
Year ended
31 March
2023
£m
Investment property revaluation (2.7)
Other income statement movements 1.7
Increase in profit / (loss) for the year (1.0)
Increase in other comprehensive income and equity 7.5
24. Capital commitments
At 31 March 2023 the Group had capital commitments of £50.8m (31 March 2022:
£53.6m) in relation to the cost to complete its forward funded pre-let
development assets and £5.7m in respect of acquisitions for which contracts
had exchanged but conditions to completion remain outstanding (31 March 2022:
£90.1m).
25. Earnings per share
Earnings per share is calculated by dividing profit for the period
attributable to ordinary equity holders of the Company by the weighted average
number of ordinary shares in issue during the period. Amounts shown below are
both basic and diluted measures as there were no dilutive instruments in issue
throughout the current or comparative periods.
Year ended Year ended
31 March 2023 31 March 2022
£m £m
Earnings (288.1) 162.0
Weighted average number of ordinary shares (million) 1,501.1 710.2
Earnings per share ("EPS") (19.2) 22.8p
Adjustments to remove:
Change in fair value of investment property 406.7 (117.7)
Loss on disposal of investment property 2.8 -
Loss on disposal of derivative 4.6 -
Loss on extinguishment of debt 20.6 -
Change in fair value of interest rate derivative (Note 16) (22.2) (1.2)
EPRA earnings 124.4 43.1
Weighted average number of ordinary shares (million) 1,501.1 710.2
EPRA EPS 8.3 6.1p
Adjustments to include:
Licence fees receivable 3.1 3.6
Amortisation of loan fees 6.1 -
Amounts received on interest rate derivatives held at fair value through 2.2 -
profit and loss
Amortisation of cash backed rental top ups and rent-free periods 0.9 3.2
Adjustments to exclude:
Accretion of tenant lease incentives (Note 8) (37.8) (9.9)
Abortive fees (Note 5) 1.5 0.6
Adjusted cash earnings 100.4 40.6
Weighted average number of ordinary shares (million) 1,501.1 710.2
Adjusted cash EPS 6.7 5.7p
Adjusted cash EPS is a performance measure used by the Board to assess the
Company's dividend payments. The metric adjusts EPRA earnings to include
licence fees receivable from developers, amortisation of rental top ups,
amounts receivable from in-the-money financial instruments and exclude
amortisation of loan fees, accretion of tenant lease incentives and one-off
abortive costs.
The Group's accounting policy for licence fees, cash backed rental top ups
received from vendors and rent-free periods that are cash covered by
developers receivable is to recognise them as a discount to the cost of the
investment property, however the Board considers these returns an important
component of the Group's performance and key to underpinning the Company's
dividend targets and payment.
26. Net asset value per share
Net asset value per share is calculated by dividing the consolidated net
assets attributable to ordinary equity holders of the Company by the number of
ordinary shares outstanding at the reporting date. Amounts shown below are
both basic and diluted measures as there were no dilutive instruments in issue
throughout the current or comparative periods.
31 March 2023 31 March 2022
£m £m
Net asset value ("NAV") 2,108.1 1,300.7
Number of ordinary shares (million) 1,714.5 911.6
NAV per share 123.0p 142.7p
Adjustments to calculate EPRA NTA (32.4) (1.2)
EPRA NTA 2,075.7 1,299.5
Number of ordinary shares 1,714.5 911.6
EPRA NTA per share 121.1 142.6p
A reconciliation of IFRS NAV per share to the three EPRA NAV measures under
the new BPR (NTA, NRV and NDV) and the two measures under old BPR (NAV and
NNNAV) is included in the section Notes to EPRA NAV calculations.
27. Secure Income REIT plc merger
On 11 May 2022, the Company announced the terms of the proposed Merger of the
Company with Secure Income REIT plc. Voting from respective shareholder groups
demonstrated overwhelming support for the merger, which completed on 6 July
2022.
The Company acquired on a share for share basis, with a 25% cash alternative,
100% of the shares of Secure Income REIT plc. The operations of SIR plc were
solely the ownership of investment properties complete with extant tenant
operating leases along with related cash and leverage and other associated
assets and working capital balances.
The Exchange Ratio (the number of LXi shares that SIR shareholders would
receive per share) was based on the adjusted and unaudited EPRA NTA per LXi
Share as at 31 March 2022 of 143.4 pence and the adjusted and unaudited EPRA
NTA per SIR Share as at 31 March 2022 of 475.5 pence. Both net asset values
were based on independent valuations as at 31 March 2022. A partial cash
alternative was made available under which SIR Shareholders could elect to
receive cash instead of some LXi shares up to a maximum of 25% of their
entitlements. On 7 July 2022 the Company issued 802.9 million ordinary shares
at 143.4p per share (1p nominal value and a premium of 142.4p) and paid
£390.2m of cash to the SIR shareholders under the partial cash alternative.
The merger has been treated as an asset acquisition for accounting purposes
rather than a business combination. Further detail of the accounting judgement
can be found in Note 2 of this report.
In accordance with the accounting requirements of an asset acquisition, the
acquisition costs related to the transaction were capitalised as part of the
transaction. This included the share issuance costs.
This reporting period includes the results of the enlarged entity from the
date of completion which was 6 July 2022.
The merger resulted in the addition of 160 investment properties to the
portfolio, recognised at £2,395.9m as disclosed in Note 8, being the fair
value of those assets at the date the merger completed. £827.4m of SIR plc
borrowings were also brought into the Group, as disclosed in Note 14, being
the fair values of those liabilities at the date the merger completed.
28. Post balance sheet events
Dividends
· On 6 June 2023 the Board approved a fourth quarterly dividend in
respect of the year ended 31 March 2023 of 1.575 pence per share, payable on 7
July 2023 to shareholders on the register at 16 June 2023. The ex-dividend
date will be 15 June 2023.
Debt
· The Company completed its significant refinancing programme on 24
April 2023 with a new, £565m secured, interest-only debt facility with a
syndicate of banks comprising a number of the Company's existing lenders. The
Company has drawn the new facilities, resulting in a 6-year weighted average
term to maturity (excluding extension options) and a weighted average capped
all-in cost of debt of 4.7%.
· On 24 April 2023 the Group drew down a £148m secured
interest-only debt facility with Canada Life.
29. Controlling parties
There is no ultimate controlling party of the Group.
Company statement of financial position
Company number: 10535081
31 March 2023 31 March 2022
Note £m £m
Non-current assets
Investment in subsidiaries 4 2,177.3 597.7
Trade and other receivables 6 455.2 -
Investment property 5 5.1 65.0
Total non-current assets 2,637.6 662.7
Current assets
Trade and other receivables 6 0.9 397.6
Derivative financial instruments 1.1 -
Cash and cash equivalents 7 0.6 13.5
Total current assets 2.6 411.1
Total assets 2,640.2 1,073.8
Current liabilities
Trade and other payables 8 230.0 111.1
Borrowings 9 384.5 -
Total current liabilities 614.5 111.1
Total liabilities 614.5 111.1
Net assets 2,025.7 962.7
Equity
Share capital 11 17.1 9.1
Share premium reserve 12 2,120.8 940.0
Capital reduction reserve - 21.0
Retained earnings (112.2) (7.4)
Total equity 2,025.7 962.7
Net asset value per share - basic and diluted 13 118.2p 106.0p
The Company has taken advantage of the exemption allowed under Section 408 of
the Companies Act 2006 and has not presented its own profit and loss account
in these financial statements. The loss and total comprehensive loss
attributable to shareholders of the parent Company for the year amounted to
£31.2m (31 March 2022: £9.5m loss).
The Company financial statements were approved and authorised for issue by the
Board on 6 June 2023 and signed on its behalf by:
Cyrus Ardalan
Chairman
Company statement of changes in equity
Year ended 31 March 2023 Share capital Share premium reserve Capital reduction reserve Retained earnings Total equity
Note £m £m £m £m £m
Balance at 1 April 2022 9.1 940.0 21.0 (7.4) 962.7
Loss and total comprehensive income attributable to shareholders - - - (31.2) (31.2)
Transactions with owners
Issue of ordinary shares in the year 11,12 8.0 1,180.8 - - 1,188.8
Dividends paid in the year 10 - - (21.0) (73.6) (94.6)
Balance at 31 March 2023 17.1 2,120.8 - (112.2) 2,025.7
Year ended 31 March 2022 Share capital Share premium reserve Capital reduction reserve Retained earnings Total equity
Note £m £m £m £m £m
Balance at 1 April 2021 6.2 544.5 62.1 2.1 614.9
Loss and total comprehensive income attributable to shareholders - - - (9.5) (9.5)
Transactions with owners
Issue of ordinary shares in the year 11,12 2.9 402.6 - - 405.5
Share issue costs 12 - (7.1) - - (7.1)
Dividends paid in the year 10 - - (41.1) - (41.1)
Balance at 31 March 2022 9.1 940.0 21.0 (7.4) 962.7
NOTES TO THE COMPANY FINANCIAL STATEMENTS
Basis of preparation
The financial information contained in this announcement has been prepared on
the basis of the accounting policies set out in the financial statements for
the year ended 31 March 2023. Whilst the financial information included in
this announcement has been computed in accordance with Financial Reporting
Standard 100 Application of Financial Reporting Requirements ('FRS 100') and
Financial Reporting Standard 101 Reduced Disclosure Framework ('FRS 101'),
this announcement does not itself contain sufficient information to comply
with FRS 100 and FRS 101. The financial information does not constitute the
Company's financial statements for the year ended 31 March 2023, but is
derived from those financial statements.
Those financial statements give a true and fair view of the assets,
liabilities, financial position and profit and loss of the Company. Financial
statements for the year ended 31 March 2023 will be delivered to the Registrar
of Companies following the Company's Annual General Meeting.
The Independent Auditor's report on the 31 March 2023 financial statements was
unqualified, and did not contain statements under s498(2) or (3) of the
Companies Act 2006.
The Company is registered in England and Wales under company registration
number 10535081.
Disclosure exemptions adopted
In preparing these financial statements the Company has taken advantage of
disclosure exemptions conferred by FRS 101 and therefore these financial
statements do not include:
· Certain disclosures regarding the Company's capital;
· A statement of cash flows;
· The effect of future accounting standards not yet adopted;
· The disclosure of the remuneration of key management personnel;
and
· Disclosure of related party transactions with other wholly owned
members of the Company.
In addition, and in accordance with FRS 101 further disclosure exemptions have
been adopted because equivalent disclosures are included in the Group
Financial Statements. These financial statements do not include certain
disclosures in respect of:
· Financial instruments; and
· Fair value measurement other than certain disclosures required as
a result of recording financial instruments at fair value.
The principal accounting policies applied in the preparation of the financial
statements are set out below.
The Company's financial statements are presented in Sterling, which is also
the Company's functional currency.
· Standards effective from 1 April 2022
See Note 1 of the Consolidated Financial Statements.
2. Significant accounting judgments, estimate and assumptions
In the application of the Company's accounting policies, which are described
in Note 3, the Board is required to make judgments, estimates and assumptions
about the carrying amounts of assets and liabilities that are not readily
apparent from other sources. The estimates and associated assumptions that
have a significant risk of causing a material adjustment to the carrying
amounts of assets and liabilities within the next financial year are outlined
below:
Estimates:
· Valuation of investment property
The Company's estimates in relation to its investment property are consistent
with the Group for which details are given in the Note 2 to the consolidated
financial statements.
Judgments:
· Classification of lease arrangements - the Company as lessor
The Company's judgments in relation to its classification of lease
arrangements are consistent with the Group for which details are given in the
Note 2 to the consolidated financial statements.
· Lease term
Rental income is recognised on a straight-line basis over the expected lease
term. A judgement has to be made by the Directors as to the expected term of
each lease. The judgement involves determining whether extension option
clauses on certain leases will be exercised. This judgement impacts the length
of time over which lease incentives are recognised. The key element of this
judgement is whether the Directors can be "reasonably certain" that any breaks
in place to extend the lease term will be exercised at the expiry of the
current lease. The Directors concluded that it was impossible to say with
reasonable certainty that an option will be exercised. The Directors concluded
that lease terms should be restricted to the initial length of the lease, or
to the break date, except where reversionary lease have already been executed
or where options to extend have already been exercised.
3. Principal accounting policies
The principal accounting policies adopted in the preparation of the Company
financial statements are consistent with the Group which are described in Note
3 to the consolidated financial statements. Policies adopted in the
preparation of the Company's financial statements that are not included in the
consolidated financial statements are given below:
· Investment in subsidiaries
Investment in subsidiaries is included in the statement of financial position
at cost less provision for impairment.
· Loans to subsidiaries
Impairment provisions for receivables from and loans to subsidiaries are
recognised based on a forward-looking expected credit loss model. The
methodology used to determine the amount of provision is based on whether
there has been a significant increase in credit risk since initial recognition
of the financial asset, twelve month expected credit losses along with gross
interest income are recognised. For those for which credit risk has increased
significantly, lifetime expected credit losses along with the gross interest
income are recognised. For those that are determined to be credit impaired,
lifetime expected credit losses along with interest income on a net basis are
recognised.
4. Investment in subsidiaries
31 March 2023 31 March 2022
£m £m
At beginning of the year 597.7 597.7
Additions in the year 1,579.6 -
At end of the year 2,177.3 597.7
A list of the Company's subsidiary undertakings is included in Note 22 to the
consolidated financial statements.
5. Investment property
Freehold
£m
Year ended 31 March 2023
Balance at 1 April 2022 65.0
Investment property disposals (58.8)
Change in fair value (1.1)
Balance at 31 March 2023 5.1
Year ended 31 March 2022
Balance at 1 April 2021 4.5
Investment property additions 61.9
Change in fair value (1.4)
Balance at 31 March 2022 65.0
Detailed information about the valuation of investment property is included in
Note 8 to the consolidated financial statements.
6. Trade and other receivables
31 March 2023 31 March 2022
£m £m
Amounts due from subsidiaries - 396.2
Recoverable VAT 0.8 0.5
Rent receivable - 0.8
Prepayments and other receivables 0.1 0.1
Total current trade and other receivables 0.9 397.6
Amounts due from subsidiaries 455.2 -
Total non current trade and other receivables 455.2 -
Following the merger with SIR plc the company undertook a detailed review of
the intercompany balances and determined that they no longer expect the
balances to be settled within one year. As such, following the change in
intentions, the amounts due from subsidiaries have been reclassified to non
current assets.
7. Cash and cash equivalents
31 March 2023 31 March 2022
£m £m
Cash at bank 0.1 3.0
Cash held by lawyers 0.5 10.5
Total cash at bank 0.6 13.5
8. Trade and other payables
31 March 2023 31 March 2022
£m £m
Amounts due to subsidiary undertakings 217.3 109.1
Accruals and deferred income 5.8 1.1
Trade creditors 1.2 -
Other creditors 5.7 0.9
230.0 111.1
All amounts are due for payment within one year.
9. Bank borrowings
Drawn Undrawn Total
£m £m £m
Year ended 31 March 2023
At beginning of the year - - -
New facilities 385.0 - 385.0
At end of the year 385.0 - 385.0
Less: unamortised loan arrangement fees (0.5) - (0.5)
384.5 - 384.5
Year ended 31 March 2022
At beginning of the year - - -
New facilities - - -
Drawdowns - - -
Repayments - - -
At end of the year - - -
Less: unamortised loan arrangement fees - - -
- - -
Maturity of bank borrowings
31 March 2023 31 March 2022
£000 £000
Repayable within 1 year 385.0 -
Repayable between 1 and 2 years - -
Repayable between 2 and 5 years - -
Repayable after 5 years - -
385.0 -
The Company's borrowings comprise the following:
Acquisition facility
· In May 2022 the Company entered into a £385.0m unsecured
interest only loan with Barclays Bank Plc and HSBC Plc in order to fund the
Merger. Interest on the loan increases by 25bps every quarter, from a starting
point of 1.5%. The rate payable as at 31 March 2023 1.75%. The loan is
repayable in May 2024 assuming two six-month extension options are exercised.
This was repaid post year-end.
The Company has remained compliant with the covenants throughout the period up
to the date of this report.
10. Dividends
31 March 2023 31 March 2022
£m £m
Dividends paid 94.6 41.1
Detailed information about the dividends paid by the Company is included in
Note 18 to the consolidated financial statements.
After the year end the Directors became aware of a technical issue in respect
of certain dividends paid since the Merger. Further detail is given in the
Directors' report in the Annual Report.
11. Share capital
31 March 2023 31 March 2022
£m £m
Share capital 17.1 9.1
Detailed information about the share capital of the Company is included in
Note 17 to the consolidated financial statements.
12. Share premium reserve
31 March 2023 31 March 2022
£m £m
Share premium 2,120.8 940.0
Detailed information about the share premium of the Company is included in
Note 17 to the consolidated financial statements.
13. Net asset value per share
Net Asset Value ("NAV") per share is calculated by dividing net assets in the
company statement of financial position attributable to ordinary equity
holders of the parent by the number of ordinary shares outstanding at the end
of the period. There are no dilutive equity instruments outstanding.
31 March 2023 31 March 2022
£m £m
NAV 2,025.7 962.7
Number of ordinary shares (million) 1,714.5 911.6
NAV per share 118.2p 105.6p
14. Related party transactions
The Company has taken advantage of the exemption not to disclose transactions
with other members of the Group as the Company financial statements are
presented together with the consolidated financial statements.
Note 21 to the consolidated financial statements includes details of other
related party transactions undertaken by the Company and its subsidiaries.
15. Guarantees
The Company has given a full guarantee on some of the Group's loan facilities
to the lenders.
16. Ultimate controlling party
There is no ultimate controlling party of the Company.
17. Post balance sheet events
Since the year end the Company has received dividends totalling £370m from
its subsidiaries.
NOTES TO THE EPRA AND ALTERNATIVE PERFORMANCE MEASURES (UNAUDITED)
The Group considered EPRA NTA to be the most relevant NAV measure for the
Group and we are now reporting this as our primary NAV measure, replacing our
previously reported EPRA NAV and EPRA NAV per share metrics. EPRA NTA excludes
the cumulative fair value adjustments for debt-related derivatives which are
unlikely to be realised.
As at 31 March 2023
EPRA NTA EPRA NRV EPRA NDV
£m £m £m
Net asset value 2,108.1 2,108.1 2,108.1
Mark-to-market adjustments of derivatives (32.4) (32.4) -
Fair value of debt(1) - - (54.5)
Real estate transfer tax - 176.3 -
At 31 March 2023 2,075.7 2,252.0 2,053.6
Number of ordinary shares (million) 1,714.5 1,714.5 1,714.5
Per share 121.1 131.4 119.8
As at 31 March 2022
EPRA NTA EPRA NRV EPRA NDV
£m £m £m
Net asset value 1,300.7 1,300.7 1,300.7
Mark-to-market adjustments of derivatives (1.2) (1.2) -
Fair value of debt - - 8.8
Real estate transfer tax - 101.5 -
At 31 March 2023 1,299.5 1,401.0 1,309.5
Number of ordinary shares (million) 911.6 911.6 911.6
Per share 142.6 153.7 143.7
EPRA NIY and EPRA 'Topped Up' NIY
31 March 31 March
2023 2022
£m £m
Investment property - wholly owned 3,356.3 1,544.4
Less: development properties (85.7) (123.6)
Completed property portfolio 3,270.6 1,420.8
Allowance for estimated purchasers' costs 222.4 96.5
Gross up completed property portfolio valuation (B) 3,493.0 1,517.3
Annualised passing rental income 201.9 74.5
Less: contracted rental income in respect of development properties (4.8) (5.6)
Property outgoings - -
Annualised net rents (A) 197.1 68.9
Contractual increases for lease incentives(2) 129.8 31.9
Topped up annualised net rents (C) 326.9 100.8
EPRA NIY (A/B) 5.6% 4.5%
EPRA Topped Up NIY (C/B) 9.4% 6.6%
EPRA Vacancy Rate
31 March 31 March
2023 2022
£m £m
Annualised estimated rental value of vacant premises - -
Portfolio estimated rental value(3) 197.1 68.9
EPRA Vacancy Rate 0% 0%
EPRA Cost Ratio
Year ended Year ended
31 March 31 March
2023 2022
£m £m
Property operating costs - -
Vacant property costs - -
Administration expenses(4) 18.8 9.3
Total costs (both including and excluding vacant property costs(5)) 18.8 9.3
Total gross rental income 198.2 58.5
Total EPRA cost ratio (including and excluding vacant property costs) 9.5% 15.9%
EPRA LTV
Year ended Year ended
31 March 31 March
2023 2022
£m £m
Borrowings from financial institutions 1,250.0 246.0
Net payables 53.7 20.3
Exclude cash (74.4) (72.5)
Net debt (a) 1,229.3 193.8
Built investment property at fair value 3,356.3 1,544.4
Fair value of properties under development 30.1 -
Net receivables - -
Total property value (b) 3,386.4 1,544.4
LTV (a/b) 36% 13%
Total NAV return
Year ended Year ended
31 March 31 March
2023 2022
p p
EPRA NTA per share at beginning of the period 142.6 125.7
EPRA NTA per share at end of the period 121.1 142.6
Change in EPRA NTA per share in the period (21.5) 16.9
Dividend per share paid in the period 6.3 6.0
Total of change in EPRA NTA and dividend per share (15.2) 22.9
Total NAV return (10.7)% 18.2%
1 Difference between interest bearing loans included in the EPRA net
assets at amortised cost, and the fair value of interest bearing loans
2 E.g. Step rents and expiry of rent free periods
3 Excludes contracted rents receivable on development properties
4 The Group does not have a policy of capitalising overheads and all
administrative expenses are recognised in the P&L in the period to which
they relate
5 The Group has no vacant property costs
FINANCIAL INFORMATION
This announcement does not constitute the Group or Company's statutory
accounts. The financial information for the year ended 31 March 2022 is
derived from the statutory accounts for the same year, which will be delivered
to the registrar of companies. The Independent Auditor's report on the 31
March 2023 financial statements was unqualified, and did not contain
statements under s498(2) or (3) of the Companies Act 2006.
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact
rns@lseg.com (mailto:rns@lseg.com)
or visit
www.rns.com (http://www.rns.com/)
.
RNS may use your IP address to confirm compliance with the terms and conditions, to analyse how you engage with the information contained in this communication, and to share such analysis on an anonymised basis with others as part of our commercial services. For further information about how RNS and the London Stock Exchange use the personal data you provide us, please see our
Privacy Policy (https://www.lseg.com/privacy-and-cookie-policy)
. END FR FFMBTMTTMTBJ
Recent news on LXi REIT
See all newsLXI REIT PLC LondonMetric - Scheme of arrangement becomes effective
LXI REIT PLC LondonMetric - Court sanction of Scheme of Arrangement
Completed £250M sale to Travelodge of 66 hotels
LXI REIT PLC LondonMetric - Results of Court Meeting and LXI General Meeting
Disclosure under Rule 2.10(c) of the Takeover Code