LXB Retail Properties – LON:LXB
Share Price – £0.315
Market cap – £53m
This is the second special situation share I have been involved with. For posterity, I would like to direct readers to my first, which ended in me taking a small loss due to not having the stomach to wait out a takeover of a failing electronics company. While I believe the investment thesis for this company is much stronger than my failed Sepura investment, I do want to explicitly mention that I have gotten this sort of thing wrong in the past.
With the pre-amble out of the way, the company in question is LXB Retail, a British property company (mostly UK commercial) that is currently liquidating (voted on by shareholders and well under way); which I believe contains significant upside that may be realised within a very short time frame. Management have already returned the majority of NAV, and we’re now in the final innings with regard to the final distributions. I believe management are trustworthy and will do the right thing (Chairman Phil Wrigley is well-known and an experienced executive) and all actions by the company thus far have indicated as such.
If we can accept that management will do the right thing, naturally readers will be asking, where is the value? Indeed, if you look at the most recent interim, it suggests minimal value over stated NAV (33.7p) will be realised as the current share price trades at just a shave under that at 31.25p.
I believe that stated NAV is an incorrect approximation for what shareholders should realise. If one reads through all the shareholder communications, it’s quite clear that significant value above NAV remains unrealised. In the Chairman’s letters to shareholders, he has consistently and quite explicitly stated this, specifically pointing to the company’s still under development Rushden Lakes project as an example of an asset being carried at less than true value.
The Rushden Lakes project is the major remaining commercial development that is still ongoing for the company. Phase 1 is in the final stages of completion (retail and restaurants) while planning permission for Phases 2 and 3 (cinema, leisure developments and restaurants) has been approved (although currently under review by the Secretary of State, but not expected to be blocked). The company describes this project in further detail on its website. While the company no long owns the development (On May 2016, LXB sold this development to The Crown Estate) they are still responsible for managing the development and letting of the project. Naturally, the £65m sale price agreed for the development isn’t be the final consideration, as each stage attains full planning permission, and a certain amount of the property is pre-let, additional cash payments are triggered. With phases 2 and 3 now almost entirely at the thresholds required to be fully pre-let and unconditionally planning approved, the final cash payments should soon be triggered.
The initial and potential future proceeds (net of funding costs and excluding any potential further receipts for the second and third phases at Rushden Lakes) which will result from these transactions are expected to be approximately £150m of which £68.7m will be received by mid-May 2015. The transactions are also anticipated to deliver an additional NAV uplift of approximately £37m over and above the values reflected in the September 2014 balance sheet. This accretion to NAV is expected to be realised in the Group’s results over the next two financial years.
I should also comment on ultimate value. It is impossible to provide a forecast of what the end NAV in the portfolio will be as it is dependent on the outcome of a number of incomplete projects, some of which are subject to some material uncertainties which are still to be resolved, and now within a much reduced timescale. Notwithstanding those challenges, we remain confident that the end value for Shareholders will exceed the 64.18p per share referred to above by a comfortable margin. (18p dividend has been paid out since then, also 12.5p lost due to delays and cost overruns)
Your Board and the Investment Manager are committed to completing the proposals as quickly as possible. As and when lettings are completed and/or sales made we will review the possibility of returning further cash before any final proposals are put to Shareholders, and we look forward to the confirmation of the planning for Phases 2 and 3 at Rushden Lakes which will have a material impact bearing in mind the current NAV.
“In my Chairman’s statement dated 21 November 2016 I said that;
“The amount of ultimate value realisation is heavily dependent on the grant of planning and a legal agreement with The Crown Estate at Rushden Lakes and a successful sale of Stafford Riverside, but your Board remains confident that the final figure will be in excess of the NAV reported today” The NAV at that date was 38.7p per share, as adjusted for a further return of capital. Today’s announcement brings a successful conclusion to the sale of Rushden Lakes Phase 2 a little nearer and whilst the caveats set out in my statement of 21 November 2016 remain, the Board has no reason to believe that in excess of the NAV of 38.7 p per share is an unrealistic aim.”
In the April 2015 note, a total possible NAV uplift for all three phases of the Rushden project was pegged at £37m. £19.5m of that uplift was booked for the closing of Phase 1, which would suggest that a possible £17.5m remains on the closing of Phase 2 and 3, or about 10.4p per share. The 10.4p of remaining uplift combined with 33.7p of current NAV, suggests a final return of 41.1p, which would tie in with the most recent management statement of a return “in excess of 38.7p per share”. Assuming that Phases 2 and 3 of the Rushden project are finally approved at the end of August (management guidelines), at that point the 10.4p can be booked, giving me a return of up to 30%.
Of course, the worst case scenario is that the Secretary of State overrules the planning decision for Phases 2 and 3 of Rushden. In that case, no uplift in NAV is realised, but at since the company already trade at a discount, a possible loss on the downside should be minimal. Another risk is further delays and cost overruns, I hope this is unlikely, given that the additional works that Phases 2 and 3 of Rushden that were required have now been all put in place.