Property trust builds on solid foundations
The investment column that makes the most of your money
INFLATION is rising, the economic outlook is uncertain and many companies are concerned about the future. Against that environment, shares that pay a decent dividend are increasingly attractive, particularly if they are likely to continue doing so for many years.
Property specialist LXI Reit fits firmly into that category. The company is set to join the stock market on February 27 at 100p and is targeting a dividend of at least 5p from next year, increasing steadily thereafter. Total shareholder returns, including any share price rises, are expected to be 8 per cent and above over the coming few years.
Reit stands for real estate investment trust, a type of property company listed on the Stock Exchange’s main market and which pays out 90 per cent of its taxable income as dividends.
LXI intends to buy commercial properties, which will be let to big businesses on 20 to 30-year, inflation-linked leases. That means that if inflation rises, the rents increase in line. The group will target tenants from a variety of sectors, such as leading retailers, international manufacturers and hotel chains.
The company hopes to raise between £200million and £300million in the flotation and expects to use most of that within six months. A number of properties have been identified, discussions have begun and in several cases the group is in exclusive talks with the sellers.
LXI has been set up by Osprey Equity Partners, a private investment business specialising in commercial property. In the past four years alone, Osprey has completed 21 deals valued at around £700million in total. Most have involved letting to well-known businesses on long-term, inflation-linked leases.
Tenants include supermarkets Aldi, Sainsbury’s and Tesco, hotel chain Travelodge, discount group B&M, health food firm Holland & Barrett, which needed a headquarters building, and Premier Inn, which has leased a building in London’s Brick Lane. None of these properties will join the LXI portfolio, but the Osprey team will use their relationships with these companies and others like them to find attractive tenants for their new listed business.
LXI will be managed by John White and Simon Lee, who cofounded Osprey in 2011, have spent six years working closely with one another and have almost five decades of commercial property experience between them.
The group is chaired by Stephen Hubbard, who chairs UK CBRE Group, the world’s largest property advisory firm. Having worked in the sector since 1976, he is one of the best known figures in the British property world and is also on the board at the successful office rental group Workspace (recommended by Midas at 668p in November 2014, now 780p). Notably, Hubbard and his three fellow non-executive directors will be paid in LXI shares, a considerable vote of confidence in the company’s success. Building on their experience at Osprey, White and Lee intend to invest in existing properties and those at the development stage. Developers often need extra cash to fund their sites, particularly as banks are less willing to lend to this sector than before the financial crisis.
Providing cash to developers will generate extra income for LXI, as it will receive interest from the borrowers and will be able to buy completed properties at a discount.
To reduce risk, LXI will fund developments only if the sites have been pre-let to reputable tenants. Developers will also be responsible for any cost over-runs and delays.
LXI will spend the next few months building up its portfolio, so the dividend is likely to be around 3p in the year to March 2018, rising to at least 5p after that. Dividends will also be paid quarterly.
The shares are available via a wide range of stockbrokers and other intermediaries, all of whom can be found on the LXI website. The deadline for participation is Tuesday, so those interested must act fast.
Midas verdict: LXI will offer a decent dividend and the shares are expected to increase steadily in value from the subscription price of 100p. The managers and the board are extremely experienced and the business looks sound. A good buy for investors in search of dependable, long-term income.
To be traded on: Main market Contact: lxireit.com
Ticker: LXI
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