Inflation-protected income and capital returns

Transcription

1 Inflation-protected income and capital returns Interim Report For the period from incorporation to

2 LXi REIT plc ( the Company or LXi REIT ) a UK Real Estate Investment Trust ( REIT ), is listed on the premium listing segment of the Official List of the UK Listing Authority and was admitted to trading on the main market for listed securities of the London Stock Exchange in February. The Company invests in UK commercial property assets let, or pre-let, on very 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 property sectors. The Company also invests 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. We aim to provide our shareholders with regular, attractive income, with the potential to grow the dividend in absolute terms through upward-only inflation-protected long-term lease agreements, together with capital growth over the medium term. Contents Highlights 1 Chairman s statement 3 Investment Advisor s report 5 Property portfolio 11 Investment objectives and policy (summary) 12 Principal risks and uncertainties 13 Directors responsibility statement 14 Independent review report to LXi REIT plc 15 Consolidated statement of comprehensive income 16 Consolidated statement of financial position 17 Consolidated statement of changes in equity 18 Consolidated cash flow statement 19 Notes to the financial statements 20 Directors, advisors and other information 37

3 Highlights At p NAV 5.94% AVERAGE NIY 24 Years WAULT 96% INDEX-LINKED RENT 7.15% NAV GROWTH 17 STRONG TENANTS 8 PROPERTY SECTORS 25 SEPARATE PROPERTY ACQUISITIONS FINANCIAL HIGHLIGHTS The Net Asset Value ( NAV ) and European Public Real Estate Association ( EPRA ) NAV per share has increased to pence as at, an increase of 7.15% from the 98.0 pence at the time of the Company s initial public offering ( IPO ) in February The Company and its subsidiaries ( the Group ) investment properties acquired within the period were independently valued on at 159,915,000 including all forward funded development commitments, representing an increase of approximately 8.5% above the aggregate acquisition price (excluding acquisition costs). The properties have been valued on an individual basis. No portfolio premium has been applied Profit before tax for the period of 9,683,912 An interim dividend of 1.0 pence per share in respect of the period from incorporation to will be paid on 29 December, with payments to be made on a quarterly basis thereafter. The Company is on track to pay a minimum total dividend of 3.0 pence per share for the period from IPO until 31 March 2018 and a minimum total dividend of 5.0 pence per share for the period from 1 April 2018 until 31 March 2019, in line with the Company s stated target at launch* Loan to value ( LTV ) ratio of 28.5% as at with long-term 12-year debt of 55 million Aggregate all-in debt cost across the portfolio of 2.93% pa, fully fixed for the 12-year loan term (expiring July 2029) The Company s IPO in February raised gross proceeds of 138 million at an issue price of 100 pence per share. The Company is listed on the premium listing segment of the Official List of the UK Listing Authority and was admitted to trading on the main market for listed securities of the London Stock Exchange on 27 February *these are targets only and not a profit forecast and there can be no assurance that they will be met. OPERATIONAL HIGHLIGHTS Net IPO proceeds and loan facility fully deployed within approximately six months, in line with the Company s stated target at launch Attractive average net initial property yield of 5.94% Long weighted average unexpired lease term to first break of 24 years 96% of the income is index-linked or contains fixed uplifts Assets are broadly diversified across eight different defensive and robust sectors: hotels (30%), supported living (21%), care homes (13%), industrial (11%), car parks (11%), discount retail (6%), leisure (5%) and automotive (3%) The rental income is secured against 17 strong tenants, including Aldi, Costa Coffee, General Electric, Home Bargains, Motorpoint, Premier Inn, The Priory Group, Q-Park, SIG, Specialist Housing Associations, Starbucks and Travelodge Significant geographic diversification across 14 different counties in the UK The properties have been acquired via 25 separate purchase transactions, with an average lot size of 7 million and a good mix of pre-let forward funding, forward commitment and built asset structures 1 LXi REIT Interim Report

4 Post balance sheet highlights 6.0% AVERAGE NIY 24 Years WAULT 97% INDEX-LINKED RENT 19 STRONG TENANTS 8 PROPERTY SECTORS 30 SEPARATE PROPERTY ACQUISITIONS POST BALANCE SHEET HIGHLIGHTS Additional 60.2 million of gross proceeds raised on 12 October pursuant to a Placing of new shares at an issue price of pence per share ( Second Issue ) The Group has now fully deployed the net proceeds of its Second Issue. The headline statistics for the Group s current total portfolio acquired since IPO are: 241 million of equity and debt capital deployed (excluding acquisition costs) Attractive average net initial property yield of 6.0% Long weighted average unexpired lease term ( WAULT ) to first break of 24 years 97% of the income is index-linked or contains fixed uplifts Assets are diversified across eight defensive and robust sectors: hotels (25%), supported living (24%), care homes (22%), industrial (8%), car parks (8%), discount retail (6%), leisure (4%) and automotive (3%) Rental income is secured against 19 strong tenants, including Aldi, Costa Coffee, General Electric, Home Bargains, Lidl, Motorpoint, Premier Inn, Prime Life, The Priory Group, Q-Park, SIG, Specialist Housing Associations, Starbucks and Travelodge Significant geographic diversification across 18 different counties in England and Northern Ireland The properties have been acquired mainly off-market via 30 separate purchase transactions, with an average lot size of 8 million and a good mix of pre-let forward funding, forward commitment and built asset structures The Company has agreed heads of terms for a second, long-term debt facility (subject to contract and credit committee approval), which is expected to legally complete in December. This facility will be used to fund the further acquisitions which are within the Company s immediate pipeline. The Company s loan-to-value ratio, aggregating this new facility and the Company s existing Scottish Widows loan, will be within its target ratio of 35% Market capitalisation now exceeds 200 million 2 LXi REIT Interim Report

5 Chairman s statement STEPHEN HUBBARD Chairman I am pleased to present the interim results for the Group for the period from its incorporation to (the Period ). The Company commenced business operations on 27 February when its ordinary shares ( Shares ) were admitted to trading on the main market for listed securities of the London Stock Exchange, with gross proceeds of 138 million having been raised in the Company s IPO. The Company has performed strongly since its launch, delivering on its stated objectives and meeting and in many areas exceeding our original expectations at IPO. The Company is advised by LXi REIT Advisors Limited (the Investment Advisor ), whose principals have built a successful track record in this sector and they continue to draw on their excellent network of relationships, experience and market intelligence. This allows the Company to source attractive investments, and coupled with the Investment Advisor s robust capital discipline, create value for our shareholders at the point of acquisition. In accordance with the Company s investment policy, the net proceeds of the IPO have been invested in a portfolio of commercial property assets let, or pre-let, on very long, inflation-linked leases to a wide range of strong tenant covenants across a diverse range of property sectors. As at, the Group s portfolio consisted of 17 individually strong tenants across eight defensive and robust property sectors. Across the Group s assets, the average net initial yield was 5.94%, the WAULT to first break was 24 years and 96% of the income was index linked or had fixed uplifts. The portfolio was 100% let or pre let and is a good mix of pre-let forward funding, forward commitment and built asset structures. The Group s portfolio has been independently valued by Knight Frank LLP in accordance with the RICS Valuation Professional Standards. As at, the Group s portfolio had a market value of 159,915,000 including all forward funded development commitments, representing an increase of approximately 8.5% above the aggregate acquisition price (excluding acquisition costs). The properties have been valued on an individual basis. No portfolio premium has been applied. We have seen significant support from existing shareholders and welcomed a number of new investors in October, when the Company completed an additional issue of Shares, raising gross proceeds of 60.2 million and taking the market capitalisation to over 200 million. FINANCIAL RESULTS The NAV and EPRA NAV per share has increased to pence as at, an increase of 7.15% from the 98.0 pence at the time of the Company s IPO in February. The asset value growth reflects: (i) the discount achieved on forward funding pre-let developments in small lot sizes, (ii) early mover advantage in growth sectors, (iii) yield compression in the wider long-lease sector and (iv) the off-market nature of the vast majority of the Company s acquisitions. Four pre-let forward funded acquisitions with a total purchase price of c. 30 million were not included in the period end valuation as although they exchanged prior to, they had not legally completed as at that date. This provides further asset value growth potential. The operating profit of the Group for the Period was 9,683,912. DIVIDENDS The Company has declared its first interim dividend of 1.0 pence per Share, which will be payable on 29 December to shareholders on the register at 1 December, with dividends payable quarterly thereafter. The Board is currently targeting an aggregate dividend of at least 3.0 pence per Share for the first full financial period to 31 March 2018 and a minimum total dividend of 5.0 pence per Share for the full financial period to 31 March 2019, in line with the Company s stated target at launch. FINANCING The Group entered into a new, 12-year, interest only, 55 million (28.5% LTV) loan agreement with Scottish Widows at an all-in fixed rate of 2.93% pa, expiring in July This provides a wide spread (over 300 basis points) between the current average net initial property yield of 5.94% and the 2.93% per annum fixed rate. 3 LXi REIT Interim Report

6 Chairman s statement (continued) OUR TENANTS The Group s rental income was secured against 17 strong tenants, including Aldi, Costa Coffee, General Electric, Home Bargains, Motorpoint, Premier Inn, The Priory Group, Q-Park, SIG, Specialist Housing Associations, Starbucks and Travelodge. We work hard to develop a collaborative and long-term relationship with all of our tenants and we continually strive to work in partnership with them. CORPORATE GOVERNANCE The Group benefits from a strong board with substantial real estate, financial, commercial and operating experience and has the appropriate sub-committees (including Audit Committee and Management Engagement Committee), which meet on a regular basis. The Board is responsible for leading and controlling the Company and has overall authority for the management and conduct of the Company s business, strategy and development. The Board also approves in advance each potential property acquisition, along with other significant matters, including debt facilities and material appointments. THE INVESTMENT ADVISOR LXi REIT has appointed LJ Capital Limited as LXi REIT s alternative investment fund manager (the AIFM ). LXi REIT and the AIFM have appointed LXi REIT Advisors Limited ( LXi REIT Advisors ) as the Company s Investment Advisor to provide certain services in relation to LXi REIT and its portfolio, including sourcing and advising on investments for acquisition by LXi REIT and due diligence in relation to proposed investments. LXi REIT Advisors has provided the Group with access to investment opportunities at attractive pricing through the Investment Advisor s long-established industry contacts and extensive knowledge of the sector. The Investment Advisor has achieved a prominent position in developing and acquiring long income properties and this expertise and network of contacts provides the Group with access to off-market transactions and specialised pre-let forward funding opportunities. POST-BALANCE SHEET MATTERS We were delighted that Shareholders continued to support our growth plans by subscribing for an additional 60.2 million of equity in October pursuant to a Placing of new shares at an issue price of pence per share ( Second Issue ). The Company has now fully deployed the net proceeds of its Second Issue. The headline statistics for the Group s total portfolio acquired since IPO are: 241 million of equity and debt capital deployed (excluding acquisition costs) Attractive average net initial property yield of 6.0% Long weighted average unexpired lease term to first break of 24 years 97% of the income is index-linked or contains fixed uplifts Assets are diversified across eight robust sectors: hotels (25%), supported living (24%), care homes (22%), industrial (8%), car parks (8%), discount retail (6%), leisure (4%) and automotive (3%) Rental income is secured against 19 strong tenants, including Aldi, Costa Coffee, General Electric, Home Bargains, Lidl, Motorpoint, Premier Inn, Prime Life, The Priory Group, Q-Park, SIG, Specialist Housing Associations, Starbucks and Travelodge The Group has also now agreed heads of terms for a second, long-term debt facility (subject to contract and credit committee approval), which is expected to legally complete in December. This facility will be used to fund the further acquisitions which are within the Group s immediate pipeline. The Group s loan-to-value ratio, aggregating this new facility and the Group s existing Scottish Widows loan, will be within its target ratio of 35%. OUTLOOK The Group has performed strongly since the Company s IPO in February this year, effectively executing on its stated objectives and in many areas exceeding its original expectations. We have acquired a high quality portfolio of assets, diversified by sector, strong tenant covenant and geography, at attractive yields and in line with our investment policy. We are already delivering excellent returns to our shareholders through a secure, diversified and growing index-linked income stream as well as attractive capital appreciation from across our long-let portfolio, reflecting our Investment Advisor s disciplined and value-led approach to investments. Following the successful full deployment from our second equity fundraise, the Company is continuing to build on this growth momentum and expects its pipeline of attractive additional investment opportunities to further enhance its portfolio. We remain confident about driving further value for our shareholders in the second half of the financial year and beyond and fulfilling our longer-term ambitions. Finally, I would like to thank shareholders, my fellow Directors and the Group s Investment Advisor for their support since the Company s launch. Stephen Hubbard Chairman 23 November 4 LXi REIT Interim Report

7 Investment Advisor s report LXi REIT plc is a real estate investment trust targeting attractive inflation-protected income and capital returns through a diversified portfolio of very long-let and index-linked UK property assets. The Company is listed on the premium listing segment of the Official List of the UK Listing Authority and was admitted to trading on the main market for listed securities of the London Stock Exchange on 27 February. The Group has effectively executed its investment strategy of delivering inflation-protected income and capital returns underpinned by a portfolio of secure, long-let and index-linked property assets, highly diversified by sector, tenant and geography. This has been a successful and active period for the Group and we are well positioned to continue to deliver on the Company s investment strategy and target returns to the Company s investors through our robust long-established relationships and experience in the sector underpinned by our value-led approach to investments. DELIVERING ATTRACTIVE GROWING INCOME AND CAPITAL GROWTH The Group s investment properties acquired within the period were independently valued on by Knight Frank LLP at 159,915,000 including forward funded commitments (a 5.4% blended Net Initial Yield), representing an increase of approximately 8.5% above the aggregate acquisition price (excluding acquisition costs). The properties have been valued on an individual basis. No portfolio premium has been applied. The NAV and EPRA NAV per share has increased to pence as at, an increase of 7.15% from the 98.0 pence at the time of the Company s IPO in February. The asset value growth reflects, inter alia: the discount achieved on forward funding pre-let developments in small lot sizes (c. 50 to 100 basis points); early mover advantage in growth sectors where yields have compressed (including supported living and discount retail); MULTI-SECTOR DIVERSIFICATION AS AT 30 SEPTEMBER % of portfolio valuation Hotels 30% Supported living 21% Care homes 13% Industrial 11% Car parks 11% Discount retail 6% Leisure 5% Automotive 3% MULTI-SECTOR DIVERSIFICATION AS AT TODAY % of portfolio valuation Hotels 25% Supported living 24% Care homes 22% Industrial 8% Car parks 8% Discount retail 6% Leisure 4% Automotive 3% yield compression in the wider long-lease sector in recent months, resulting from increased demand; and the off-market nature of the vast majority of the Group s acquisitions. Four pre-let forward funded acquisitions with a total purchase price of c.30 million were not included in the period end valuation as although they exchanged prior to, they had not legally completed as at that date. This provides further asset value growth potential. The profit before tax for the period was 9,683, LXi REIT Interim Report

8 Investment Advisor s report (continued) TENANT DIVERSIFICATION AS AT 30 SEPTEMBER % of portfolio valuation Housing Associations (multiple tenants) 21% Travelodge 14% The Priory Group 13% Q-Park 11% QHotels 10% Premier Inn 7% General Electric 6% SIG 5% Aldi 3% Motorpoint 3% Home Bargains 2% Costa Coffee, KFC, Heron Foods, Subway, Starbucks and Greggs (combined) 5% TENANT DIVERSIFICATION AS AT TODAY % of portfolio valuation Housing Associations (multiple tenants) 24% Prime Life 12% Travelodge 11% The Priory Group 10% Q-Park 8% QHotels 8% Premier Inn 8% General Electric 5% SIG 4% Aldi 2% Motorpoint 2% Lidl 2% Home Bargains 1% Costa Coffee, KFC, Heron Foods, Subway, Starbucks and Greggs (combined) 3% The Board has approved an interim dividend of 1.0 pence per share in respect of the period from incorporation to to be paid on 29 December, with payments to be made on a quarterly basis thereafter. The Company is on track to pay a minimum total dividend of 3.0 pence per share for the period from IPO until 31 March 2018 and a minimum total dividend of 5.0 pence per share for the period from 1 April 2018 until 31 March 2019, in line with the Company s stated target at launch. PORTFOLIO OVERVIEW The headline statistics for the portfolio, as at, were: Average net initial yield 5.94% WAULT to first break 24 years Index-linked income or fixed uplifts 96% Tenants 17 Property sectors 8 Separate property acquisitions 25 LXi REIT fully deployed the net proceeds of its 138 million IPO and 55 million debt facility within approximately six months of listing on 27 February. LXi REIT has acquired assets with a long WAULT to first break of 24 years which is one of the longest in the sector. The assets have been let to a wide range of tenants with strong financials and a proven long-term operating track record across a diverse range of property/industry sectors and locations. As at, the portfolio comprised of 17 individually strong tenants across eight defensive and robust property sectors and diversified over 14 different counties in the UK. The Group s highly diversified portfolio is rare and such diversification provides a defensive and secure portfolio and has allowed the Group to avoid overheated sectors and locations in order to find real value and growth potential. In addition, by being cross-sector, the Group has been able to obtain early mover advantage in sectors where yields are expected to compress (such as supported living and discount retail) and act in an opportunistic manner to achieve attractive pricing due to particular vendor circumstance. Over 96% of the Group s assets contain rent reviews linked to RPI or CPI inflation (or a fixed annual growth rate) thus providing strong inflation-protected income across the Group s portfolio. As at : approximately 25% of assets, by value, had no caps on rental growth of the balance which had such caps, the average cap was approximately 4.1% per annum (and the average minimum was approximately 1.1% per annum) approximately 40% of assets, by value, had annual rent reviews, with the balance on five yearly review cycles the assets with five yearly review cycles benefit from a staggering of the next review date (e.g. some have their five-yearly review within the next one, two and three years) of the 96% with index-linked or fixed uplifts, approximately 50% had CPI linked rent reviews, 40% had RPI linked rent reviews and 10% had fixed rental uplifts All of the assets acquired by the Group benefit from triple net, full repairing and insuring leases. These lease agreements oblige the tenants to pay all taxes, building insurance, other outgoings and repair and maintenance costs on the property, in addition to the rent and service charge, therefore avoiding any property cost leakage for the Group. STRATEGIES FOR DELIVERING VALUE AND GROWTH The Investment Advisor employs a number of techniques to secure assets for the Group at an attractive initial yield, without compromising on the asset quality, security or lease length, including: the multi-sector approach, which allows for opportunistic buys across a large universe of assets to find value; forward funding pre-let developments to benefit from materially lower purchase costs (approximately 3% versus 6.8%) as well as a significant discount to built values (circa 50 to 100 basis points), especially in smaller lot sizes; 6 LXi REIT Interim Report

9 targeting smaller lot sizes generally (averaging 8m per acquisition to date), which are below the radar of most institutions; acquiring the vast majority of its assets through off-market purchases identified via the Investment Advisor s extensive contacts and relationships, driven by its reputation for speed and certainty of transacting; avoiding over-heated sectors and locations where yields are at historic lows; repeat business with longstanding counterparty relationships, including developers, vendors and agents; and early mover advantage in under-exploited sectors, such as specialist supported living and discount retail STRONG RESIDUAL LAND VALUE In addition to robust tenants and long, index-linked leases, the Group targets assets which possess strong residual land value which will preserve capital values. For example, the Group has acquired properties: which are of strategic importance to the tenant; with strong underlying trading performance; located in areas with a large catchment population; with low starting rents; and with strong alternative use value. LONG LEASES The Group has been able to acquire assets with long leases: where there are very competitive tenant markets with multiple competing operators, coupled with limited supply of stock, such as budget hotels (for example, Premier Inn, Travelodge, Accor, Motel One and Holiday Inn) and discount retailers (for example, Aldi, Lidl, B&M and Home Bargains); where assets are of strategic importance to the particular tenant, such as its headquarters office or main production plant; and where tenants are used to long-term freehold ownership, such as GE, Premier Inn, Lidl and Aldi. FORWARD FUNDING PRE-LET DEVELOPMENTS The Group s portfolio consists of a mix of built and forward funded assets. As at, approximately 35% of the portfolio was structured as forward fundings/forward commitments. These forward funding assets are pre-let developments which benefit from materially lower purchase costs as well as significant discounts to built values. This approach to forward funded pre-let developments, especially in the lower lot sizes, has allowed the Group to source high quality, lower-priced assets (compared to their completed value) with reduced competition and lower transaction costs, than could be delivered from purely targeting built assets GEOGRAPHIC DIVERSIFICATION AS AT 30 SEPTEMBER 1 General Electric Cramlington, Northumberland 2 Q-Park Sheffield City Centre, Yorkshire 3 Travelodge, Starbucks & Greggs Melksham, Wiltshire 4 Travelodge Haverhill, Essex 5 Cambridge Belfry Hotel Cambourne, Cambridge 6 Premier Inn & Beefeater Whitley Bay, North Tyneside 7 Aldi anchored retail park Bradford, Yorkshire 8 Travelodge, Starbucks & Subway Swindon, Wiltshire 9 SIG Trading Limited Carlisle, Cumbria 10 Priory Care Home Leeds, Yorkshire 11 Supported Living Kent 12 Supported Living West Sussex 13 Supported Living Gloucestershire 14 Travelodge Ipswich, Suffolk 15 Travelodge, Costa and KFC Camborne, Cornwall 16 Premier Inn Middlesbrough, Yorkshire 17 Priory Care Home Co. Armagh, Northern Ireland 18 Priory Care Home Newtownabbey, Northern Ireland 19 Supported Living Lancashire 20 Supported Living Merseyside 21 Supported Living Yorkshire 22 Motorpoint Lancashire PRIORY CARE HOME PORTFOLIO Diverse locations across Northern Ireland Description Portfolio of three specialist care homes Purchase Price 14.9 million Net Initial Yield 6.5% Acquisition Structure Pre-let forward commitment and built asset mix Date Acquired August Rent Review Fixed uplifts of 2.5% pa Tenant/Guarantor The Priory Group Lease Term 29 years unexpired, with no break LXi REIT Interim Report

10 Investment Advisor s report (continued) GE MANUFACTURING FACILITY Cramlington, Northumberland Description Headquarters office and manufacturing facility Purchase Price million Net Initial Yield 5.75% Size 74,110 sq ft Acquisition Structure Pre-let forward funding Date Acquired March Rent Review Retail Prices Inflation (RPI) Tenant/Guarantor GE UK Group Lease Term 20 years, without break, from completion of construction works On all forward funded acquisitions the following risk mitigants were put in place prior to acquisition: the Group 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; full planning consent must be in place; a suitable tenant pre-let must be in place; the developer will receive their profit only when the asset achieves practical completion; if there is a delay to completion of the works, this will be a risk for the developer/contractor, as they pay the Group a licence fee, which is treated as a discount to the overall cost of the asset, to the date that practical completion occurs; PREMIER INN Middlesbrough, North Yorkshire Description Premier Inn budget hotel Purchase Price 6.2 million Net Initial Yield 5.10% Size 83 bedroom hotel Acquisition Structure Pre-let forward commitment Date Acquired August Rent Review Consumer Prices Inflation (CPI) Tenant/Guarantor Premier Inn Hotels Limited/Whitbread PLC Lease Term 25 years from completion of construction works, with a one-off break right at year 20 the contractor will be a reputable entity with a proven track record and will provide a parent company guarantee or performance bond; and a full suite of warranties will be provided by the main contractor and professional team. MARKET OPPORTUNITY RENTAL GROWTH Inflation has historically outpaced open-market rent reviews and it has been steadily increasing since the EU referendum result in June 2016, which triggered a decline in the value of the pound and pushed up the cost of imported goods. As set out below, the anticipated continuing outperformance of inflation over open market rental growth forecasts is expected to prove advantageous to the Group s rental growth. The HM Treasury Forecasts for the Economy (August ) shows an average RPI growth forecast of 3.2% per annum and an average CPI growth forecast of 2.3% per annum from to 2021 (see below). The Investment Property Forum UK Consensus Forecasts Report (Summer ) shows an average open market rental growth forecast of 0.9% per annum from to 2021 (see below), which is materially lower than the above mentioned HM Treasury RPI and CPI growth forecasts. 8 LXi REIT Interim Report

11 CAMBRIDGE BELFRY HOTEL Cambourne, Cambridge Description 4 star, full service hotel Purchase Price million Net Initial Yield 6.10% Size 120 bedrooms Acquisition Structure Built asset Date Acquired April Rent Review Consumer Prices Inflation (CPI) Tenant/Guarantor QHotels Holdings Limited Lease Term 22 years unexpired, with no break RPI AND CPI FORECAST Year RPI pa CPI pa 3.5% 2.7% % 2.6% % 2.2% % 1.9% % 1.9% Average growth forecast pa 3.2% 2.3% Source: HM Treasury Forecasts for the Economy (August ) OPEN MARKET RENTAL GROWTH FORECAST Year Open market rental growth pa 0.9% % % % % Average rental growth pa 0.9% SIG MANUFACTURING FACILITY Carlisle, Cumbria Description Manufacturing facility Purchase Price 9.3 million Net Initial Yield 7.0% Size 248,333 sq ft Acquisition Structure Built asset Date Acquired June Rent Review Retail Prices Inflation (RPI) Tenant/Guarantor SIG (Trading) Limited Lease Term 25 years unexpired, with no break Source: Investment Property Forum UK Consenus Forecasts (Summer ) With strong inflation and more pedestrian open market rental growth, the Group has strategically aimed to take advantage of this economic reality with 96% of its passing rent being inflation-linked or containing fixed uplifts as at. This climate of continuing inflation together with the fixed low cost of debt (as detailed below) which the Group has secured, is expected to allow for: higher rental growth via rental increases in line with inflation; enhanced dividend yield due to substantial free cash flows generated via the 300 bps spread between triple-net rental income (5.94% average NIY) and low fixed cost of debt (2.93% pa) rising to potentially 550 bps by expiry of the 12-year loan facility; and capital growth through: (i) the capitalisation of rental increases following rent reviews; (ii) acquiring mispriced assets where the seller is driven by factors other than price; and (iii) the net purchase price on forward funding assets being a significant discount to completed values and therefore, providing scope for natural yield compression as soon as the property is constructed. DEBT FINANCE The Group entered into a new, 12-year interest-only, fixed-rate, 55 million term loan agreement with Scottish Widows on 4 July (the Facility ). The Facility is repayable on 3 July 2029 and has a fixed all-in rate payable of 2.93% per annum, for the duration of the 12-year loan term. This fixed interest rate is 300 basis points lower than the Group s average net initial yield on property acquisitions of 5.94% and this spread is expected to rise to approximately 550 bps by expiry of the 12-year loan facility (see below). The rate of 2.93% is highly accretive to the Group s anticipated future dividend and mitigates potential interest rate and refinancing risks for the 12-year period. 9 LXi REIT Interim Report

12 Investment Advisor s report (continued) NET INITIAL PROPERTY YIELD VERSUS FIXED COST OF GROUP S LOAN Property NIY% Loan interest % bps spread 396 bps spread 505 bps spread 554 bps spread 2.93 (Scottish Widows 12 year loan fixed at an all-in rate of 2.93%pa) Today Year 5 Year 10 Year 12 Assumes 3% pa rental growth. There can be no assurance that the Company s portfolio will deliver the yield referred to in this table. The Facility is secured against both the built and forward funded assets acquired by the Group utilising the equity raised on admission in February. The full drawing of the Facility reflects a loan-to-value ratio of 28.5%. As set out in the Group s investment policy, 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 35% of the Group s gross assets. The Group has also now agreed heads of terms for a second, long-term debt facility (subject to contract and credit committee approval), which is expected to legally complete in December. This facility will be used to fund the further acquisitions which are within the Group s immediate pipeline. The Group s loan-to-value ratio, aggregating this new facility and the Group s existing Scottish Widows loan, will be within its target ratio of 35%. SECOND RAISE AND FURTHER ACQUISITIONS The Company raised an additional 60.2 million of gross equity proceeds on 12 October pursuant to a Placing of new shares at an issue price of pence per share ( Second Issue ), taking the market capitalisation to over 200 million. The Company has now fully deployed the net proceeds of its Second Issue. The headline statistics for the Group s total portfolio acquired since IPO are: 241 million of equity and debt capital deployed (excluding acquisition costs) Attractive average net initial property yield of 6.0% Long weighted average unexpired lease term to first break of 24 years 97% of the income is index-linked or contains fixed uplifts Assets are diversified across eight robust sectors: hotels (25%), supported living (24%), care homes (22%), industrial (8%), car parks (8%), discount retail (6%), leisure (4%) and automotive (3%) Rental income is secured against 19 strong tenants, including Aldi, Costa Coffee, General Electric, Home Bargains, Lidl, Motorpoint, Premier Inn, Prime Life, The Priory Group, Q-Park, SIG, Specialist Housing Associations, Starbucks and Travelodge Significant geographic diversification across 18 different counties in England and Northern Ireland The properties have been acquired mainly off-market via 30 separate purchase transactions, with an average lot size of 8 million and a good mix of pre-let forward funding, forward commitment and built asset structures OUTLOOK We are very pleased with the Group s strong performance during what was a very active period, underlining our ability to successfully source and execute on attractively priced, very long-let and index-linked UK property assets leased to institutional-grade tenants. We are confident of continuing to create value for the Company s shareholders right from the point of acquisition, through investing, largely off-market, in forward funded pre-let developments in smaller lot sizes and moving early into growth sectors across the long-let property space in the UK, which is itself benefiting from yield compression. We are optimistic about continuing to deliver attractive inflation-protected income and capital growth to the Company s shareholders over the short and longer term through our diversified portfolio as well as from our growing pipeline of attractive investments. 10 LXi REIT Interim Report

13 Property portfolio As at Tenant/ Guarantor Sector Location GE UK Group Headquarters office and manufacturing facility Cramlington, Northumberland Unexpired lease term to first break Rent Review Price () Net Initial Yield Date of acquisition Structure 20 years RPI 11m 5.75% March Forward funding Q-Park N.V. Multi-storey car park Sheffield 28 years RPI 19.1m 5.20% March Built Travelodge, Starbucks & Greggs Budget hotel and drive-thru coffee shop Melksham, near Bath 23 years CPI, RPI & OMV 6.2m 5.91% March Forward funding Travelodge Budget hotel Haverhill, Essex 24 years RPI 5.5m 5.92% March Built Premier Inn QHotels Holdings Limited Aldi, Home Bargains, Heron Foods, Starbucks & Greggs Travelodge, Starbucks & Subway SIG (Trading) Limited Budget hotel & Beefeater restaurant Whitley Bay, North Tyneside 20 years CPI 6.25m 5.00% April Forward commitment Four-star hotel Cambridge 22 years CPI 18.5m 6.10% April Built Discount food stores Bradford 20 years RPI & OMV 11m 6.15% May Forward funding Budget hotel and drive-thru coffee shop and restaurant Swindon 23 years CPI, RPI & OMV 8.3m 5.80% May Forward funding Manufacturing facility Carlisle 25 years RPI 9.3m 7.0% June Built Priory Group Care home Leeds 22.8 years RPI 8.4m 6.30% June Built Housing Associations Supported Living Across England 25 years CPI 36m 6.0% June, July & August Travelodge Budget hotel Ipswich 20 years RPI 5m 6.12% July Built Travelodge, Costa Coffee & KFC Budget hotel Camborne, Cornwall Priory Group Care home Northern Ireland 29 years Fixed 2.5% pa Premier Inn/ Whitbread Group plc Motorpoint Limited Built 22 years CPI & OMV 6.7m 6.15% July Forward funding 14.9m 6.50% August Built/ Forward commitment Budget hotel Middlesbrough 20 years CPI 6.2m 5.10% August Forward commitment Automotive Burnley 19.8 years RPI 5.7m 6.50% August Built 24 years WAULT 5.94% Average NIY 11 LXi REIT Interim Report

14 Investment objective and policy (summary) LXi REIT s investment objective is to deliver inflation-protected 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. LXi REIT will seek to acquire high quality properties that meet 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; very 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. LXi REIT will target a wide range of sectors, including hotels, supported living, healthcare, industrial, leisure, discount retail, office and other alternatives. It will also focus on growth sub-sector areas such as discount retailers, budget hotel operators and specialist supported living. LXi REIT will not undertake any direct development activity nor assume direct development risk. However, LXi REIT 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, LXi REIT will seek to negotiate the receipt of immediate income from the asset, such that the developer is paying LXi REIT a return on its investment during the construction phase and prior to the tenant commencing rental payments under the terms of the lease. 12 LXi REIT Interim Report

15 Principal risks and uncertainties The Prospectus issued in February includes details of the risks faced by the business. The Board considers that the principal risks and uncertainties faced by the Group are as follows: INVESTMENT OBJECTIVE AND STRATEGY RISKS Description There are a number of risks associated with the Group and its investment strategy and operations. The Group s investment objective includes the aim of providing shareholders with an income. The payment of future dividends and the level of any future dividends paid by the Company is subject to the discretion of the Directors and will depend upon, amongst other things, the Group successfully pursuing its investment policy and the Group s earnings, financial position, cash requirements, level and rate of borrowings and availability of distributable reserves, as well as the provisions of relevant laws or generally accepted accounting principles from time to time. The Group will face competition from other property investors. Competitors may have greater financial resources than the Group and a greater ability to borrow funds to acquire properties. Competition in the property market may also lead either to an oversupply of properties in the target market through over development or the price of existing properties being driven up through competing bids by potential purchasers. REAL ESTATE RISKS Description Dividends payable by the Group will be dependent on the income from the properties it owns. Failure by tenants to comply with their rental obligations could affect the ability of the Company to pay dividends to shareholders. The Group invests in commercial properties. Such investments are illiquid; they may be difficult for the Group to sell and the price achieved on any realisation may be at a discount to the prevailing valuation of the relevant property. Any property market recession or future deterioration in the property market could have a material adverse effect on the Group. Property is inherently difficult to value due to the individual nature of each property. As a result, valuations are subject to uncertainty and there can be no assurance that the estimates resulting from the valuation process will reflect actual sales prices that could be realised by the Group in the future. ACCOUNTING, LEGAL AND REGULATORY RISKS Description Failure to adhere to accounting, legal and regulatory requirements could result in material adverse consequences to the Group. If the Group fails to qualify or remain qualified as a REIT, the Group will be subject to UK corporation tax on some or all of its property rental income and chargeable gains on the sale of properties, which would reduce the amounts available to distribute to Shareholders. ABILITY TO SECURE FURTHER FINANCE Description The Group intends to secure borrowing facilities in the future to pursue the Group s investment objective. It is not certain that such facilities will be available on acceptable terms or at all. Mitigating action The Board has set the overall investment objective and strategy of the Group. The Board reviews the performance of the Group against its investment objective at quarterly Board meetings. The Investment Advisor monitors the Group s financial position and returns on an ongoing basis. The Company s Investment Advisor has long standing relationships and an extensive track record. Mitigating action The Group only acquires assets let to strong tenants with proven operating track records who will be able to pay the rents as and when they are due. The aim of the Group is to hold the assets for long-term income. The Company acquires properties with low loan to value ratios and there is significant headroom in the loan to value default covenant of the Scottish Widows facility agreement meaning the portfolio will be resilient to any recession. An experienced independent third party valuer has been appointed. Mitigating action The Investment Advisor monitors compliance with REIT status. The Group has appointed experienced third-party tax advisers to assist with tax compliance matters with appropriate relevant experience. Calculation of dividend is to be carried out by the Administrator before review by the AIFM and Investment Advisor. The performance of the service providers is regularly reviewed by the Board. Mitigating action The Group has agreed heads of terms for a second, long-term debt facility (subject to contract and credit committee approval), which is expected to legally complete in December. UK EXIT FROM THE EUROPEAN UNION A referendum was held on 23 June 2016 to decide whether the UK should remain in the EU. A vote was given in favour of the UK leaving the EU ( Brexit ). The extent of the impact on the Group will depend in part on the nature of the arrangements that are put in place between the UK and the EU following Brexit and the extent to which the UK continues to apply laws that are based on EU Legislation. It could also potentially make it more difficult for the Group to raise capital in the EU and/or increase the regulatory compliance burden on the Group. 13 LXi REIT Interim Report

16 Directors responsibility statement The Directors confirm that to the best of their knowledge this condensed set of financial statements has been prepared in accordance with IAS 34 as adopted by the European Union and that the operating and financial review comprising this report includes a fair review of the information required by DTR and DTR of the Disclosure and Transparency rules of the United Kingdom s Financial Conduct Authority namely: an indication of important events that have occurred during the Period and their impact on the condensed financial statements and a description of the principal risks and uncertainties for the remaining six months of the financial period; and disclosure of any material related party transactions in the Period are included in note 21 to the Financial Statements. A list of the Directors is shown on page 37 of the Interim Report. Shareholder information is as disclosed on the LXi REIT plc website. For and on behalf of the Board Stephen Hubbard Chairman 23 November 14 LXi REIT Interim Report

17 Independent review report to LXi REIT plc INTRODUCTION We have been engaged by the Company to review the condensed set of financial statements in the interim report for the period from 21 December 2016 to, which comprise the consolidated statement of comprehensive income, the consolidated statement of financial position, consolidated statement of changes in equity, the consolidated statement of cash flows, and the related notes. We have read the other information contained in the interim financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements. DIRECTORS RESPONSIBILITIES The interim financial report is the responsibility of and has been approved by the Directors. The Directors are responsible for preparing the interim financial report in accordance with the Disclosure Guidance and Transparency Rules of the United Kingdom s Financial Conduct Authority. As disclosed in note 2, the annual financial statements of the Group will be prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. The condensed set of financial statements included in this interim financial report has been prepared in accordance with International Accounting Standard 34, Interim Financial Reporting, as adopted by the European Union. OUR RESPONSIBILITY Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the interim financial report based on our review. Our report has been prepared in accordance with the terms of our engagement to assist the Company in meeting its responsibilities in respect of interim financial reporting in accordance with the Disclosure Guidance and Transparency Rules of the United Kingdom s Financial Conduct Authority and for no other purpose. No person is entitled to rely on this report unless such a person is a person entitled to rely upon this report by virtue of and for the purpose of our terms of engagement or has been expressly authorised to do so by our prior written consent. Save as above, we do not accept responsibility for this report to any other person or for any other purpose and we hereby expressly disclaim any and all such liability. SCOPE OF REVIEW We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, Review of Interim Financial Information Performed by the Independent Auditor of the Entity, issued by the Financial Reporting Council for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. CONCLUSION Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the interim financial report for the period from 21 December 2016 to is not prepared, in all material respects, in accordance with International Accounting Standard 34, as adopted by the European Union, and the Disclosure and Transparency Rules of the United Kingdom s Financial Conduct Authority. BDO LLP Chartered Accountants London United Kingdom 23 November BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127). 15 LXi REIT Interim Report

18 Consolidated statement of comprehensive income For the period from 21 December 2016 to Note From 21 December 2016 to Unaudited Income Rental income 5 2,635,409 Other income 1,855 Total income 2,637,264 Expenses General and administrative expenses 6 (1,127,136) Total expenses (1,127,136) Change in fair value of investment property 10 8,501,392 Operating profit 10,011,520 Finance income 7 7,658 Finance costs 8 (335,266) Profit for the period before tax 9,683,912 Taxation 9 Comprehensive income for the period 9,683,912 9,683,912 Earnings per share basic p Earnings per share diluted p All amounts reported in the Consolidated Statement of Comprehensive Income for the period ended relate to continuing operations. Earnings per share has been based on the weighted average number of ordinary shares in issue during the period from 21 December 2016 to. The accompanying notes on pages 20 to 36 form an integral part of these financial statements. 16 LXi REIT Interim Report