The current share price is GBP1.00 and the NAV/share as at Jan 1, 2016 is GBP1.01. (per AGM
The key point here is that the GBP1.01 value is an IFRS NAV which undervalues development properties.
Below is an extract from the March2015 interim report.
“Shareholders may find it helpful to understand that the Group’s current internal appraisals are
suggesting that over time there is a further £75.8m of potential unrealised NAV in the
investment portfolio, including the further phases at Rushden Lakes. “
Adding the GBP75mil to the GBP189mil IFRS equity (see balance sheet above) implies an adjusted equity
value of GBP264mil or GBP1.44 per share. This represents a 43% premium to GBP1.01 IFRS NAV.
The reason that development assets are understated is that IFRS requires development property to be
valued using the residual method. The formula used by the residual method is
Value of Property in its Present Condition = Value of Completed contract – Costs to Complete - RiskAdjust
The “costs to complete” includes building costs and a development profit which is typically 20% of the
construction costs. The inclusion of the development profit in the calculation reduces the Residual
Values, but, remember this profit does accrue to LXB.
The calculation of Residual Values also includes a risk adjustment factor. Developments which are 100%
pre-let will have a lower risk adjustment compared to developments which are only 50% let.
Since making the GBP75mil disclosure in the March2015 report management have been curiously silent
on the understatement of the NAV. I have had to make two reasonable guesses at the latest fair value.
LXB is run by an external investment team. They have been incentivized to maximize the cash returns to
shareholders. The incentive is based on the Dec 31, 2015 NAV of GBP1.01 per share. The investment
team will get 20% of any amount above 12% per annum. March 2017 is 15 months from Jan 2016 which
implies an NAV of GBP1.16 (GBP1.01*1.12*15/12) before the investment team begin sharing in the
The investment team have been working with these assets since 2009. Given their expert knowledge, it is
interesting that they were prepared to accept the GBP1.16 threshold before sharing in the profit. To me
this signals that the ultimate value could exceed GBP1.16, but, until I know more I am going to settle on
GBP1.16 as my base case valuation.
My second guess is much more optimistic. Assuming the GBP75mil management guidance still holds,
then, the NAV jumps from GBP189mil to GBP264mil or GBP1.44 (183.6mil shares in issue). But,
remember the investment manager will take 5.6p leaving GBP1.384 for shareholders.
This implies a 38.4p profit on a 62p investment.
This sounds too good to be true, and, anyway, how can you believe management? Actually, if one reads through
the annual reports it is difficult not to be impressed by management’s achievements. Getting planning permission in the UK is an impossible task.
LXB management got permission, completed developments and let the properties despite a very tough
However, I am reluctant to pin my hopes on this valuation because there will be a rush to sell and some of the
developments will have to be sold even though they are not incomplete.
LXB plan to sell the Greenwhich and Sheppery properties in the summer 2015. The Stafford and Sutton
properties should be sold by the end of the year as these developments only complete later in 2016
Obviously, a downturn in UK retail properties is a risk end then there is Brexit .
These risks are easy to hedge with a basket of listed UK retail focused REITS (eg INTU, HMSO)
In general management have generally been successful at acquiring, gaining planning permission,
constructing, letting and then selling property developments. The tail end of the development pipeline is
completing and there is an opportunity to exploit the weaknesses in the IFRS valuations without risking much downside.
There is also the option to lock in the potential upside by shorting UK REITS to protect against any macro
weakness in the retail property sector.