LXB Retail Properties – November 2018

LXB Retail Properties – LON:LXB
Share Price – 12.7p
Market cap – £22.3M

Preamble

It’s been awhile since my last post, six months to be precise. My reason for absence wasn’t that I’ve lost interest in investing, more the fact that I just haven’t seen any value in the market in the intervening period. Thankfully though, the recent market correction has thrown up a few opportunities and assuming the market doesn’t rapidly recover, I would hope to be a little more active in the next few months.

Getting back to the topic in hand, I thought I would discuss LXB Retail Properties, a REIT I first covered over a year ago. Originally covered at 31.5p, the stock now trades at 12.7p (although we have had 11.5p of cash returned since then), a decline of some 30%. The decline has been unpleasant for shareholders and the reasons given manifold, but rather than dwelling on that, I will try to focus on the opportunity that is ahead here.

Current Situation

A lot has changed at LXB since I last posted. Firstly, earlier a hard stop for the lifetime of the company was declared, with a court scheme sanctioning a complete wind-up by March 31st 2019. Since then, the company has been on a tear disposing and completing on assets and as of today, substantially all of the remaining assets have now been sold.

Here is my estimate on the final return that shareholders can expect from here.

Cash deposits (as of March 31st 2018 interim results) – £20.43m
– £19.3m (11.5p cash returned in total since the last financial report)

Net cash £1.1m

+ £2.45m from Sheppey sale
+ £0.42m from Sheppey letting
+ £7.5m from Rushden Lakes phase 4 completion
+ £2.7m from Rushden Lakes phase 3 completion
+ £8m from Stafford sale
+ £2.7m from Biggleswade letting

Confirmed cash £24.87m

+ £5.75m from Sutton sale (guesstimate based on £6m asking price)
+ £2m from Higher Newham (bought for £2m in 2012 as agricultural land without planning permission, now has planning permission for a 130 unit residential development, surely worth at least £2m?)

Guesstimate cash £32.62m

– £3.5m administrative costs for financial year (based on trailing 12 month administrative expenses)
– £1.7m assets transferred to Topco (the court scheme said at most 1p of remaining assets were to be transferred Topco, the legacy company owned by the investment manager that will close off any loose ends)
– £1m wind-up costs, extra fees or expenses, or things I might have missed

Final cash to be returned £26.42m (15.7p a share), 25% greater than the current share price. It’s also worth bearing in mind, that management have guided to a return of 14.5p to 16.5p (I’ve taken out the cash already returned), so my return is right in that ball park.

But Wait

Could there be more? Perhaps. I think I have been reasonably conservative with my estimates, maybe too conservative.

  • For starters, the £3.5m in administrative expenses based on last year’s number could be too high when you consider the company is now a much smaller entity.
  • The £1.7m transferred to Topco to manage the legacy assets was a worst case scenario based on management comments. Perhaps this number will be lower.
  • Wind-up costs of £1m could be excessive. In the unfortunate Zamano wind-up, this cost was under £50k (albeit for a much simpler entity).
  • There is also the matter of un-let units in LXB’s flagship Rushden Lakes development that will result in extra cash payments should tenants be found. That could add an extra £2-3m to the final return.

Even discounting the potential upside to my conservative assumptions, based on today’s share price, LXB could still yield a 25% in the four months between now and formal wind-down on March 31st 2019. With all but one asset confirmed sold (Higher Newham, which may actually have already been sold, we don’t know), then only variable part of the return is the scale of the costs on running this company to liquidation. I think with my reasonably conservative wind-up costs, there is a high margin of safety here (the company would have to rack up another £5m in expenses in addition to what I have accounted for to get me to just break even here).

Over the last year, I have been buying into this position on multiple occasions (it’s the only share I have bought in the last 12 months). This position is an ultra high conviction pick for me and is now 80% of my portfolio.

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