LXi Reit (LON: LXI) shares are largely unmoved on the corporate announcement of profitable disposals and potentially useful acquisitions. Whether the acquisitions turn out to be profitable does depend upon that unknowable, the future.
LXI is a REIT, which means that it operates much more like a partnership than it does a corporation for tax reasons. By setting up so that the vast majority of profits are paid out directly to investors, there is no intervening layer of corporation tax to be paid. This does mean that investment in growth of the business from retained profits isn’t really possible – it’s already been agreed that the profits will largely be paid out to investors. On the other hand, given that structure in normal times we’d expect to gain a good yield from a Reit.
Reits don’t have to be but mostly are concentrated in the property business. It’s a structure that is suited to the business. The problem with this just recently is that of course the commercial property business was very hard hit indeed by lockdown. There is also that problem that more and more of retail sales are moving online, thus lowering the valuation of the extant retail property stock of the country. It is this which sent Intu bust and wreaked havoc on the likes of Hammerson.
What this structure means for Reits like LXi is that capital values are going to increase in one of two ways. There’s the possibility that the market valuations of the sector as a whole increase. Which isn’t, if we’re to be honest about it, what we think wholly likely in commercial property these days. Or there can be trading of the portfolio. The idea, as above, of retained profit being reinvested doesn’t really work given that commitment to return profits to shareholders as payouts.
This is where the LXi Reit announcement comes in. The company has sold out of a property in Saffron Walden at a nice enough little profit for just shy of £20 million. The result of an approach to it by a pension fund. It has also picked up a pair of properties for around £10 million. Importantly, the yields on the acquired properties are high than the exit yield on the sold. This is value addition to the portfolio and thus to shareholders.
Of course, a cumulative move of £30 million in property isn’t all that interesting for a company worth over £1 billion. So we could argue as to whether this is even material or not – perhaps just an announcement of what management is doing.
It’s also possible to wonder whether one of the purchases will be value additive over time – this might not be quite the time, with the current inflation levels, to be picking up leases with a 3.5% rent rise cap on them.
Even within this knowledge of profitable trading of the portfolio in the longer term LXI is likely to move in line with general commercial property prices. Any reason to trade would be by taking a view on that, allied with any dividend income along the way.
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Tim Worstall is a freelance writer specialising in economics and the financial markets.