On 13 April, LXi REIT announced the completion of what, for the UK property company, was a major task – refinancing £773 million (€876 million) of its debt in a short time frame against the backdrop of a volatile market.
“We were pretty relieved to get it done in this climate,” said Simon Lee, partner and fund manager at the real estate investment trust.
The final and largest element of the refinancing was a £565 million facility closed with a syndicate of banks. Prior to that, in March, LXi had arranged a 16-year, £148 million loan with insurer Canada Life – a new lender for the company – and the extension to 2024 of a £60 million loan from HSBC.
LXi, advised by Rothschild & Co, set out to replace debt due to mature over the 2023-26 period, much of which related to its July 2022 merger with Secure Income REIT, the UK company formerly partly owned by entrepreneur Nick Leslau.
Despite the challenging financing environment, Lee encountered strong lender interest in its portfolio – a wide mix of long-income UK properties, with notable assets including popular theme parks Alton Towers and Thorpe Park.
“We have 27 years to first break on our leases, and 98 percent of the income is index-linked or has fixed uplifts,” explained Lee. “So, it’s the kind of portfolio you would expect lenders to be interested in – and they were.”
Lee agreed financing conditions became tougher after the collapse of Silicon Valley Bank and the rescue of Credit Suisse. “However, we were talking to our existing lenders before SVB happened. Even post-SVB, UK banks are in a strong position. There has been a bit of a drying-up of liquidity from overseas banks, but they were not our target market.”
The driver for the refinancing effort was its merger with Secure Income REIT. The company, advised by Rothschild & Co, wanted to replace legacy debt from Secure Income that was facing near-term maturities as well as addition bridge financing from its acquisition of the company’s shares.
LXi initially planned a bond issue, but capital markets volatility made the option less attractive. Instead, it targeted a refinancing which diversified its lender group, provided a mix of loan tenors, and allowed some shorter-term operational flexibility through a revolving credit facility element.
“We did these as secured facilities, meaning it would have been harder to refinance on a piecemeal basis,” explained Lee. “Each debt security pool needed the right level of diversification, loan-to-value etc, so it was easier – albeit more painful – to do everything in one go.”
A key consideration was securing LXi’s cost of debt, enabling it to set its dividend target for next year. As a result, the REIT said it will target 6.6 pence per share in annual dividends for the year to March 2024, an increase of 4.8 percent from the previous year.
The largest element of the refinancing – the £565 million loan – was underwritten by a UK bank, with two other UK banks participating. LXi has not identified the lenders, but they are understood to be from its existing roster of banks, which comprises Lloyds, Barclays, HSBC and RBS.
The facility features a £200 million, five-year revolving credit facility, a £115 million, five-year term loan and a £250 million, three-year term loan. The blended margin was 2.23 percent over SONIA per year.
“There was strong non-bank lender interest, but they are just more expensive,” said Lee. “Non-bank lenders want between 3.5 and 5 percent margin, which is OK when the base rate is zero but not when it is more than 4 percent. If you have higher LTV or more risky assets, then that makes sense.”
Lee argued LXi got the result it wanted from the refinancing. “We were fortunate in that we started discussions and agreed terms before SVB. The terms are what they were going to be pre-SVB. It was just a little bit more nerve-wracking until it was done.
“Obviously, the reference rate is higher. But the lenders did not backtrack on the margin. Because so much of the loan is a five-year RCF, which is normally more expensive than a term loan, we were pleased with blended pricing of 2.23 percent.”
Despite its scale, the refinancing represented conservative leverage. “We borrowed at 38 percent loan-to-value on day-one, so we got lots of headroom on interest cover and LTV. The terms are what I would have expected a year ago.”
Secure Income REIT’s relatively high cost of debt meant LXi did not face a significant step-up in borrowing costs in today’s market. “The cost of debt we had before the refinancing was blended at 4.3 percent, and post the refinancing, it is 4.69 percent, so it’s not much of a change.”
An unintentional benefit to LXi of the fall in market rates immediately after the Silicon Valley collapse was a significant saving on £400 million-worth of interest rate caps, which limit the SONIA cost of the facility to 2 percent per year for the first three years. The £25 million cost of the caps was fully covered by the value of derivatives already owned by the company, but the movement in market rates helped, Lee said: “We saved around £10 million on where it would have been the previous week”.
Aside from the sheer scale of the refinancing, Lee said piecing together different elements with a range of lenders also required much consideration. “To have three lenders on the club facility, plus a long-term lender, plus the extension with HSBC, all to be done within a similar time frame because of the security pools was the main jigsaw puzzle to be done.”
LXi’s total borrowings stand at just under £1.3 billion, a slight reduction, with a weighted average maturity of six years, up from three years. Looking forward, said Lee, capital markets issuance remains a part of LXi’s thinking.
Lee has advice for borrowers with maturing loans in today’s market. “Start early, talk to your existing relationship lenders, and diversify as much as possible – don’t be too reliant on one or two lenders, which might have policy changes which mean they cannot lend to the quantum that you want.”