MIDAS SHARE TIPS UPDATE: Theme park landlord LXI REIT on track to a calmer ride
Rollercoaster ride: Landlord LXI REIT
For shareholders in LXI REIT, the landlord that leases space to the likes of Thorpe Park and Alton Towers, recent performance has been a bit of a rollercoaster.
At the start of last month, the shares were at £1.51. Now they stand at £1.19. That’s not the sort of ride any of us were queuing up for, and investors could be forgiven for wanting to get off the Ghost Train before there are any more sudden plunges.
No one buys into LXI for the thrills and spills. The company’s name, which stands for Long Indexed Income, oozes reassurance about the company’s sensible mission.
It invests in commercial property assets which it leases to household names such as Premier Inn, Starbucks and Waitrose, gaining it long-term inflation-linked income in the process. That all sounds comforting in the current climate – so why are investors climbing the Tower of Terror?
The truth is that LXI is suffering from problems that are not of its own making, which don’t look to be fully resolved soon.
The rise in gilt yields is bad news for LXI, because it impacts on valuation and the cost of debt and means that the company’s own yield looks less tasty for those looking for income. Add to these factors, worries about how a fall in online shopping and leisure activities could affect a landlord like LXI and it is no wonder that the shares slid.
The company’s trading update, out earlier this week, sought to calm fears. Coming two weeks after it abandoned a proposed deal with Sainsbury’s due in part to current volatility, the business said that the value of its assets had fallen by 1.4 per cent.
However, the company has collected 100 per cent of its rent, and broker Numis described the update as ‘solid’ and ‘reassuring’. A new and innovative funding deal, known as an ‘income strip’, has given the firm more financial headroom and most of its debts are fixed, while leases are both long term, and in some cases, inflation linked.
Midas verdict: Midas is a long-term fan of LXI, which it tipped before flotation. Investors who got in at £1 in 2017 are still in the black, but the company is well off its £1.51 high.
The world might have changed since 2017, but the fundamentals haven’t. In an inflationary environment, LXI’s leases are attractive, even if uplifts are capped so that not all rent reviews rise in line with today’s eye-watering price increases.
The company’s portfolio is strong, and the purchase of Secure Income REIT earlier this year gives it more firepower. Despite tough times, tenants like Premier Inn and Merlin are benefiting from value seekers looking for staycations while the pound is weak, which is also good news for LXI.
The shares are at a 15 per cent discount to their net asset value, and though its assets may fall in coming months as times get turbulent, this represents good value.
The five per cent yield – though less attractive as interest rates rise – is also still worth having. Buy on weakness.
Traded on: Main market Ticker: LXI Contact: lxireit.com 020 7195 1473