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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, ladies and gentlemen, and welcome to LXI REIT plc Half Year Results. [Operator Instructions] I would like to remind all participants that this call is being recorded.
I will now hand over to Simon Lee, Partner and Fund Manager, LXI REIT Advisors Limited, to open the presentation. Please go ahead.
Good morning, and thank you for joining us for the LXI Half Year Results. I'll start by reassuring everyone that none of our forecasts have been supplied by the top industry [ scientists of economics ]. Anyway, if we move on to Slide 3, this slide just sets the scene for those a bit less familiar with the company and provides a high-level overview of LXI strategy and returns to date. Our clear focus is on mission-critical assets let on very long-term leases. We now have an average of 26 years to first break, secured to a very wide range of leading operators, and today, we have over 80, with the vast majority of our income 98% inflation-linked, and highly diversified across 13 robust subsectors. We've delivered from IPO 5 years ago to the 30th of September, an average annual accounting return of over 10% per annum, and we've grown the dividend on a fully covered basis by 5% per annum compounded.
The first half of the year has been a genuinely transformational period for the group given the merger with Secure Income REIT. Slide 4, if we move on to the next page, provides a reminder of the key benefits of the transaction, including nearly GBP 9 million per annum cost savings, which will be felt even more fully in the full year results, significantly enhanced scale and liquidity with over GBP 3.7 billion worth of assets and also huge inbuilt potential for further asset management and portfolio management opportunities. All of this places us in a very strong position to weather the current market and economic turbulence.
These results also clearly demonstrate the benefits in a rising interest rates and rising yield environment, but firstly, never buying assets below a 5% yield; secondly, linking our rents to inflation; and thirdly, avoiding single sector exposure in favor of a highly diversified approach.
Let me now hand over to Freddie to talk through Slide 5 and the financial highlights for the half year.
Thanks very much, Simon, and very good morning to everyone on the call, and welcome, firstly, to those of you attending for the first time as LXI shareholders and indeed to analysts covering the company for the first time at this half year. Thank you all very much for joining us this morning. Our merger with Secure Income REIT completed in July, as Simon mentioned, and really has been a very smooth and successful process operationally. And in terms of context, what we have here on Slide 5, our results for half year comprising 1 quarter of LXI stand-alone numbers, which include the continued deployment of GBP 250 million that we raised just before the beginning of this half year in February '22, which feels like a lifetime ago sitting here today, as well as the impact of the merger itself in terms of both cost and immediate growth, and then almost a full quarter of the enlarged group to 30th of September 2022.
And overall, I think these numbers demonstrate firstly, the defensive quality to the portfolio in terms of the challenging economic market conditions that we've entered since the turn of the year. And secondly, the efficiency with which the merger was carried out in terms of cost discipline. And finally, the opportunities to unlock value afforded by a portfolio of such scale.
So to take you through the key numbers here, the portfolio valuation grew from GBP 1.5 billion to GBP 3.7 billion in the 6-month period, which was the result of the merger offset by a modest like-for-like value reduction, which Simon will take you through shortly in more detail.
And the group's EPRA NTA, our key NAV metric, reduced by 2% over the half year. And I'll show you a bit later in the presentation how that breaks down. But in short, it was driven by the like-for-like value reduction, coupled with the merger costs, netted off by the value that we unlocked through the Merlin income strip’ transaction, which Simon will talk through in much greater detail later on, which also brought down our pro forma net LTV from 37% to 33% with significant headroom to our borrowing policy cap of 40% and back toward our medium-term target of 30%, which we expect to return to over the medium term.
We paid and declared dividends totaling 3.15p per share in respect to the half year and continue to progress towards our annual targets of 6.3p per share. And our cash adjusted earnings fully covered those dividends, but it's worth noting here that the forward-looking run rate of our earnings provides much more significant cover as the company has begun to benefit from full deployment of that GBP 250 million of equity that we raised shortly before the beginning of this period, significant rental growth through indexing reviews during and since the half year, and greater cost efficiencies post the merger and those GBP 8.6 million of cost savings that Simon pointed to on the slide before as well as the earnings accretion provided since the period end by the repayment of the Merlin A sterling facility, which carried a 5% cost per annum and replacement of that capital with the income strip disposal at a sub 3% yield. So a 200 basis point savings come through there.
Total NAV return for the period was broadly neutral as the income return delivered to shareholders offset that reduction in EPRA NTA and we continue to improve our market-leading EPRA cost ratio of 12% and total expense ratio of 0.9%.
I'll hand back over to Simon on Slide 6.
Thanks, Freddie. Slide 6 shows our key priorities for the next 6 months, what we're calling the three Rs. So these are Refinancing, Recycling capital and Regearing our leases.
Firstly, in terms of Refinancing. Our plan is to execute an attractive refinancing plan to push out both the maturities of the 2023 and 2024 maturing debt and allow us to protect the company's long-term progressive dividend policy. And I'm pleased to say that we're already in advance discussions on a number of financing alternatives with attractive offers received, and we expect to be executing all of the refinancing within the remainder of our financial year, i.e., before March 2023.
Secondly, in terms of Recycling capital, this is something that we've always done. We've never felled [ in love ] with our assets, and we've always sought to boost returns by having this sort of double whammy of buying well, selling and then buying in an accretive yield. And I think even in this more difficult climate, it's testament to the quality of our portfolio that we have received numerous unsolicited offers in a wide range of the assets that we own. And we expect, therefore, to be selectively and prudently selling some assets over the course of the second half of the year to either reduce leverage or actually to generate value through accretive acquisitions, or perhaps a combination of the two.
And in terms of Regearing leases, this is really a follow-on from an existing strategy, where even though we already have very long-term leases averaging 26 years, the strong relationships and the key nature of the assets that we own for our tenants has put us into a great position to further extend the leases.
You would have seen just pre the merger that the Secure Income REIT, Board and Prestbury management team extended the leases on the Merlin assets very materially out to 55 years. We are, I'm pleased to say, in legal hands on another key tenant material regear to push out the lease length, again, very considerably, and we have other discussions on that front as well.
I think just the brief summary of that is, we have, as Freddie mentioned, a large diversified portfolio with significant embedded value that allows us to generate value even just looking it internally without having to look to external opportunities.
Let's move now please to Slide 7. And this gives a little bit more detail on, as Freddie mentioned, the portfolio evaluation movements. So as of September, we have just under GBP 3.7 billion of assets. And the like-for-like valuation change was negative 1.4% over the 6-month period. And that was a reflection of a yield expansion from 4.5% to 4.9%, a 40 bp movement reflecting the wider movements in the market. Now that movement was offset very materially by the actual 2.5% for like-for-like rental growth across the portfolio, not ERV, but actual incepted rental growth, which I think demonstrates the defensive benefit of index-linked reviews to cushion an expansion of yields.
In terms of the portfolio movement by sector, we listed out on this particular slide. And I think it's fair to say that the -- as the wider market has experienced, those subsectors with the sharpest of yields have experienced more outward movement to get closer to that cost of debt and also as a percentage of lower movement. So we've seen industrial and food stores decline in value. The most material, food stores down 8.4%; and industrial, 12.5%. Now that has been largely counteracted by positive movements for other subsectors. So the largest movements on the positive side have been theme parks, plus 5.3% and budget hotels, plus 4.6%. And both of those have really benefited materially from rental growth, where their specific rent reviews have incepted during that period. So the Merlin assets have benefited from a 3.9% rental growth during the period and budget hotels, 3.6%.
And both of those subsectors have materially outperformed both in 2021 and in 2022 year-to-date. When you look at the key tenants there in the form of Premier Inn and Travelodge on the budget hotel side. And if you look at the operating theme parks, that is Merlin. And again, actually, interestingly, and perhaps counterintuitively, both of those tenants, those 3 tenants in both those subsectors also outperformed materially during the GFC.
And I think one of the real benefits of the Secure Income REIT portfolio is that the ownership of those assets goes back to pre-GFC. And so a key part of our due diligence on the merger was to see how those assets performed in difficult times, and we could see those yields being relatively stable and the operation being profitable during those difficult periods as well.
Let's move on to Slide 8 please, which is an overview of the portfolio as it stands today. So highly diversified and significantly scaled, as we say, just under GBP 3.7 billion of assets, 26 years unexpired lease term to first break with 98% of the income index linked or containing fixed uplifts and a rent roll of over GBP 200 million per annum. And as we mentioned, that the top 100% let or pre-let. Well diversified across 13 subsectors with a particular focus on sectors that either are in defensive nondiscretionary areas. So I'm thinking particularly in things like health care and food stores, but also in what we think of the sort of trade down sectors such as the budget hotels and the discount food stores, where in this more difficult climate, both consumers and businesses trade down to a much lower cost option, which these particular tenants and subsectors that we have benefit from.
If we move on to Slide 9, this gives a little bit more detail of one of the key transactions that took place during the period. It completed after and exchange conditionally during, so the main earnings accretion will be seen post 30th September, so will be coming much more materially into our full year results. The NAV uplift that Freddie mentioned at the top did take place within that period because there was an unconditional exchange.
So this was a slightly rare or very rare transaction, which we benefited from as a result of really the very unusually long-term nature of the leases to Merlin, and these are 55 years to break, but even more fundamentally, the underlying longevity of those operating assets.
So if you look at Alton Towers and Thorpe Park, which were the 2 assets that benefited from the income strip transaction, these are assets that will perform as key theme parks with a market-leading for many, many years to come. And that type of longevity allowed us to create a novel 65-year income strip.
What that means is we own the freehold to these 2 assets with very long leases, as I say, 55 years to Merlin. We sold 30% of the income, the net rental income from these assets to a large U.K. institution. That was structured as effectively a sale and leaseback where we transferred the freehold to take back 999-year passive leases with the right to buy back in year 65 to freehold for GBP 1 by just complete nominal value.
And now the key points here really were both the NAV and earnings accretion. So in a rising interest rate environment and no doubt, timing was partly lucky, but also hopefully a bit of foresight. We sold the -- or transacted the income strip at a level that was below 3%. So a 2.96% exit yield. And we took the sale proceeds, which were GBP 257 million and used them to repay a much higher cost of debt on those assets, 4.95% per annum.
And so we had a 240 bps yield spread, which will be coming through as multiple millions of earnings addition over the period from completion, which took place in October. So I think hopefully, it demonstrates the quality of these assets, the longevity of these assets and some foresight in terms of an ability to asset manage and work these assets and sweat, and some outstanding assets that we own, creating NAV accretions, earnings accretion and also in this environment, reducing our LTV materially from 37% to 33%.
And last little bonus at the end of it was we -- after completing the transaction, we closed out the benefit of a cap that we had on the interest rate exposure, which netted us over GBP 23 million worth of cash benefit. And that is not -- what the majority of that is not actually in the NAV as at, at the end of September, and we used that to pay down the revolving credit facility, which we can then redraw if we wish in due course.
Let me hand back now to Freddie to Slide 10 to talk you through in a little bit more detail on the income statement.
Thanks, Simon. So the next 3 slides just take us through some detail behind the results and the financial highlights that I talked through earlier. The first here on Slide 10 shows the income statement for the half year, and just highlighting the scale that's been achieved here since the previous half year through a combination of deployment of new equity and the merger with Secure Income REIT in the second quarter, resulting in operating profit increasing 214% before adjusting for fair value changes.
Overall, profit was down as a result of the fair value loss recognized in the year, primarily that being the 1.4% like-for-like reduction in valuation along with the associated costs of the merger that were capitalized and then expensed through fair value changes. But in cash terms, on a per share basis, we generated 3.1p per share, fully covering the 2 dividends paid and declared in respect of this period.
And similarly, on the balance sheet, moving on to Slide 11, please. Total assets increased 172% through the merger, offset by the valuation hit and merger costs that resulted in an EPRA NTA of 139.7p per share, down 2% on the prior year. But combining that NAV return with the dividends that we paid gave a total accounting return of 0.1% for the half year, so broadly neutral over that 6-month period.
And finally, on the results, just moving to Slide 12. The NAV bridge here just takes you through the key contributors to that journey from March NTA of 142.6p to September NTA of 139.7p. So you see the dividend and the earnings in the half year offsetting, as you would expect, and the like-for-like property loss reducing NTA by 2.6p, a the merger costing 2.1p per share, offset by the net positive impact of the Merlin Income strip transaction, which provided a net 1.8p uplift to shareholders during the half year.
Moving to the next slide please, Slide 13. Simon already mentioned in the three Rs that a key focus for us in the second half of the year is extending the maturity of our capital stack and refinancing our shorter-term debt maturities to provide investors and other stakeholders with certainty and on the right on our long-term dividend progression. And Slide 13 here just gives a summary reminder of where our debt is today.
And I think the key points to pull out here on this slide other than the near-term maturities, which we'll talk to in a moment, is the relatively low LTV across the facilities we're refinancing. And that really does put us in a more comfortable position to enhance our optionality when we come to refinance those.
Our priorities specifically in refinancing are a continuation of the complementary structure debt strategy to LXI and Secure Income REIT combining long-term certainty of funding to deliver income accretion to investors, a very low-risk debt strategy with significant headroom to covenants and discrete security pools with no cross default and maintaining operational flexibility, importantly to us, within our portfolio to allow us to continue to execute capital recycling and asset management initiatives to deliver value to shareholders.
Moving on to Slide 14, please. This just shows a realistic but illustrative refinancing scenario, which shows us continuing to have a minority of the portfolio secured against longer-term fixed rate loans by which we mean over 10-year maturity, and building out the revolving credit facility of the group to provide that flexibility that we desire both in terms of recycling capital, reducing leverage over the medium term at no or very low cost to shareholders and giving the company the optionality to tap the debt capital market to the point in time in the future, should that become an attractive option to group again.
And whilst the terms that we highlight here are illustrative, they are based on our assessment of the market as well as genuine ongoing commercial negotiations that are underway with new and existing lenders. And our desire, as Simon mentioned already, is to have the refinancing locked in early on in Q1 2023.
You can see in the table then that we're refinancing debt with a weighted cost of just over 4% per annum and the range of outcomes that we present here on an illustrative basis show that cost increasing to between 4.4% and 4.8% per annum.
In terms of the sensitivity of our earnings to that increase, you can see on the right-hand side, an uptick of 25 basis points come to an annual cost of just over 0.1p per share. So no major sensitivity. And I would note that this should also be viewed in the context of the upside on our current dividend level of 6.3p when adjusted for the full deployment of the significant equity during the first quarter of this half year.
The indexed uplifts on our rent during and since the half year, the merger synergies that are yet to be reflected in our dividend targets and the post year-end refinancing that we've already unlocked through the income strip and a 200 basis point saving therein. And in view of this, we remain confident of our ability to execute an attractive refinancing package for shareholders that underwrites the long-term dividend growth and provides a very defensive balance sheet for our shareholders.
I hand back to Simon on Slide 15 with the outlook.
Thanks, Freddie. Yes. So hopefully, we've been able to demonstrate that our resilient portfolio with defensive characteristics is very well positioned to help us to navigate the oncoming economic headwinds, recessionary environment and rising rates that we're already witnessing. Our multi-sector strategy is important as are the very strong relationships that we have with our tenants, which allow us to drive value-add opportunities and provide further significant upside to investors in this type of environment.
The continued rebasing of NAVs across the subsector is expected to affect us, we think, in a slightly less material way. principally given the indefinite nature of our assets and also because of the relatively high yield that today stands at 4.9% on a valuation basis. But also when you build in the index-linked reviews over the next 5 years on sensible assumptions, then we can afford for a 70 basis point yield movement out, not that we're expecting it, to a yield of 5.6% without other things being equal, the capital values being harmed because our rental growth will be driven to that level and capitalize to evaluations.
We also think we'll benefit from this current climate through significant opportunities to acquire assets at a discount. And again, that's one of the benefits of the multi-sector strategy where we can find and cherry-pick assets on an opportunistic basis across any subsector rather than being wedded to a particular single sector.
As we said earlier on, our key focus for the next half of the year is on the three Rs of refinancing, which Freddie has talked to in detail, to protect long-term dividend growth prospects. We've made very good progress on that already. Recycling capital, as we always do to reduce debt and reinvest in opportunistic purchases, and also further material regears to unlock value in our existing portfolio to protect and enhance our capital values and income security for our investors.
So thank you very much for listening to that formal run through. Very happy to open up to any questions that we may have on the line.
[Operator Instructions] We will take our first question from John Cahill of Stifel.
I think really you've shown an absolute model example of how a merger should be done. Really great to see. I've just got 2 questions, and I'll give you them both at the same time. The first one is just a point of clarification on the Merlin income strip transaction. If some, for any reason, Merlin didn't pay the rent or reduce the rent, not something we foresee, but if that happened, can you pass that reduction on. Or would LXI have to make up for the shortfall, in that unlikely situation if that were to happen?
And then my second question is about the hotels. So the diversified characteristics of your portfolio. I mean, obviously, very highly defensive and it's a great tenant list, but we're sort of mindful, the hotel operators didn't necessarily behave very well during the pandemic and reached for that [ CVA ] mechanism very, very quickly. How should we think about that going forward? Is there a risk that if we go into a broader economic downturn that the operator might sort of think about that again? Or should we just put that behind us really as a sort of one-off that happened during lockdown? Those are the 2.
Thanks, John. So on the first question, it is a fixed rent that we pay effectively to the buyer of that income strip. So if the rent goes down in terms of what we actually receive from Merlin, then we still have to make up that shortfall. It's a commitment to make that payment, as if, I suppose you had any other forms of headlease rent that you have to pay.
I think the key point there for us is that, firstly, Merlin is a very strong covenant, is outperforming hugely and that these assets have fantastic rent cover. So we're looking at around net earnings to rent that we receive of about 3x, which is huge. And I think even more fundamentally, as we're only paying away 30%, then effectively, there's about 9x rent cover on the rent that we're actually paying across. So I think that sort of security of that income and the sort of small percentages or small level of that income is obviously what got the income buyer -- income strip buyer very comfortable to be paying a 2.96% yield.
Secondly, on the question around hotels and CVAs. [indiscernible] subject, obviously. I think circumstances are quite different in the sort of recessionary environment that we're looking at versus COVID. So COVID was hopefully, sort of one in a hundred year pandemic which was very unusual in the sense that it specifically stocked assets from being open rather than the difficult economic environment that makes consumers spend less. But actually, what we're seeing now with both Travelodge and Premier Inn, is that the current environment we're already in a recession. If you look at the current year, they are massively outperforming even pre-pandemic levels of occupancy or revenue per run and of margin.
So as an example, Travelodge's latest Q3 results show that they delivered the same profit in the first 9 months of the year as they delivered in the whole 12 months in the pre-pandemic period, and Premier Inn, very similar to that. And I think that goes to the point that we mentioned earlier, which is that in a recessionary environment of the type we're in today or entering then those sectors that are the sort of trade down alternative by the lower cost option tend to outperform materially. And both Travelodge and Premier Inn are benefiting from that today as they did in 2008 during the GFC.
There are no further questions on the conference line. I will now address the written questions submitted via the webcast page.
I will now hand over to the [ Spark Eye ] team to read out the written questions.
Thank you. There has been one question submitted by Michael Prew at Jefferies. And his question is, the sale of the Merlin income strip has been novel and highly successful. So is there scope for another income strip sale within the portfolio?
Thank you for that question. Yes, I think it sort of goes back to the type of points that I mentioned earlier when looking at the Merlin income strip, which is, the key drivers for the buyer of that income strip for that particular deal was the combination of very long-term leases in place with Merlin and also and more fundamentally, the real longevity of the underlying use of those properties.
Now there are not necessarily a huge number of subsectors or assets or portfolios that can withstand that sort of income strip for those reasons because either the leases are short or more importantly, because the buildings have a shorter shelf life and a use that could easily change.
And I think other subsectors that we do see as potentially sort of ripe for that sort of transaction or the other type of operational assets that we have in a couple of, obvious examples would be the hospitals, would be the hotels as well. So I think they are well designed for that. Whether we do another income strip is obviously to be determined. But I think we certainly have the potential opportunity given the length of the leases and the quality of the operators and most importantly, the long-term durability of those uses.
And we have another question in from James Carswell at Peel Hunt, and his question is, what is the current cost to cap, GBP 500 million to GBP 600 million on the new RCF as referred to on Slide 14?
I'll [indiscernible] it to Freddie for that one.
No problem. Yes, if we flip back to that slide, is that right? So you'll see that we assume that there's a capped cost, there's a capped SONIA rate in the estimates that we've given for the illustrative revolving credit facility pricing. What we're assuming there is that we spend the GBP 30 million of value that is in existing interest rate derivatives or was in existing interest rate derivatives at that 30th of September and therefore, it doesn't contribute to the group's EPRA NTA as of that date. So it's not NAV dilutive from an EPRA NTA perspective for us to use that GBP 30 million to roll those derivatives into a new and extended cap that would cap SONIA at between 2% and 2.5%, depending on the size and the term of the RCF.
And another question in from Mark James at Jefferies. Could you please expand on the like-for-like valuation move in food stores and how budget retailers are being impacted versus the larger format stores?
Yes, sure. No problem. So if we flip to the slide which is Slide 7. And here, we're showing that our food stores have averaged an 8.4% decline in valuation and rental growth during that period of 0.4%. Now that rental growth during that period, obviously, looks low, but that's a function of the fact that not many of the specific rent reviews took place during that period, i.e. likely to be in the next 6 months or on 5-yearly reviews over the next few years coming through.
So food stores, our sense is that the movement out of the yield there is not a reflection of the underlying performance of either the large format food store operators, [indiscernible] or otherwise or the budget hotel -- or the budget food store discounters, so Lidl and Aldi. In fact, what we have seen that Aldi and Lidl have actually outperformed during the period as they always do as you enter a recessionary environment and are now sort of sitting -- Aldi now sitting with actually within the sort top 5 grocers having taken over from Morrisons.
Really, it was more a reflection of the fact that those were tighter yields and in a rising rate environment, those tighter yields would have been more impacted than the up sector where the yields were already a bit higher. So I think we're very comfortable with the nature of those assets, in particular, the discount operators of Aldi and Lidl, which really are continuing to outperform, and we think will outperforming even further over the next sort of year or two.
And actually, a chunk of the unsolicited interest that we've received lately in our assets has been specifically into Aldi and Lidl, which I think reflects their likely operational outperformance in the next couple of years.
And we have a question from Martin King at Edison. And he asks, can you talk about your thoughts on valuation movement since September? And does that mean that capital recycling proceeds will be focused more on debt reduction as you move towards 30% LTV?
Yes. I think where valuations are going to go is obviously not completely clear, but we have seen that the market since September has remained depressed and has been, I think, characterized by some material selling by some of the larger open-ended funds that unfortunately for them, are structured in a way that in this type of climate they receive more redemptions and partly that's due to specific defined pension fund unwind issues. So there have been some assets hitting the market where those vendors really need to sell to meet their redemptions. So that, I think, is going to be affecting, already has started to affect some pricing there.
So I would expect further yield movements across the property subsectors over the next 6 months or so. I think we are expecting to see though that the assets on longer-term leases with inflation and [indiscernible] will continue to outperform as our portfolio has done against these movements, partly because of the stability of the income and partly because of the index rental growth provides an actual cushion to movements out as we mentioned earlier on.
And so I think it's those type of factors that will, I believe, provide a cushion for us along with the actual level of and the relative level of the portfolio yield. So as we've already seen, those subsectors that have the tightest yield move out more, both in actual and percentage terms in this type of climate to sort of catch up to the higher cost of debt. And so sitting here with a 4.9% yield, we feel that we're in a pretty comfortable position versus if our valuation yield was sort of in the 3s if we were in subsectors that were historically driving very low yields.
So I think we will see some further yield expansion, but again, we expect to see the sort of protections that our portfolio has witnessed that may not fully neutralize yield expansion, but will provide a cushion as it has in the last 6 months.
And then should I just cover the question around the use of proceeds, possibly. I think as Simon says, we continue to see where the market might end up and immediate use of proceeds will be to pay down that revolving credit facility. And that's one of the reasons why we like that as it allows us to pay down debt at a relatively earnings neutral rate in today's -- cost today and where we're expecting to sell assets and to see where the market stabilizes and we are expecting to see some opportunities to reinvest that and where those opportunities are accretive to our earnings, we will redeploy that capital into those opportunities.
And we have another question in from Hemant [indiscernible]. And we know that the first half of this question has already been answered. But his whole question was, with regards to the income strip, what recourse do strip owners have to the asset if in the unlikely situation you can't pay the income strip? Should we think of this as very long-term dated debt with fixed and floating elements?
Thank you. Yes, as you say, we've sort of dealt with part of that point already. I think you can categorize it in different ways. You can think of it as a sort of headlease rent or you can think of it as some form of kind of alternative leverage. I think the protections that we've mentioned really relate to the fact that this is only about 10% of the underlying net earnings generated by that tenant that we have to pay away in the rent.
And it's also -- if you think about it, that's a level that we're paying away at sort of 2.96% level. If we had debt, and we've repaid debt on -- fully on those assets, then you would still have to pay your debt even if rent wasn't received. So you're in no worse position than if you had leverage and actually in a better position here in the sense that the cost is materially lower.
So I think you can look at it in different ways, but you're certainly in no worse position and you should be subject to the rate as we are here, and in a better position than you were from a debt perspective. I think sort of final small point of detail there is that the obligations on that are ring-fenced to SPVs that own those particular assets. They are not recoursed to PLC or otherwise, and that clearly shows the quality, the stand-alone nature of those assets and the type of ring-fencing that we would always put in place, whether it was debt or sort of headlease rent.
Yes. I think the key similarities to debt, as Simon mentioned there, is really what I'm asked, which is default risk, and that's ring-fenced to the specific SPVs. In terms of the key differences to pull out, which I think are kind of more highlighted in the current environment, there are no financial covenants, which is a big difference to that and a big attraction from our perspective. There's no interest rate risk, obviously, very important in the current climate. And there's no refinancing risk that you'd have with other debt facilities. So I think there are some similarities in terms of the structure, but there are some key differences that make it more attractive, and not just the cost saving element.
Thank you. There are no further questions. I will now hand back to Simon Lee for closing remarks.
Great. Well, listen, thank you very much. I just want to say thank you to the hosts for making this as smooth as possible. And thank you, everyone, for joining and for your support and look forward to hopefully meeting up with you on a face-to-face basis shortly. Thanks, again.