LXi REIT commissioned Greengage to develop sustainability performance targets and KPIs to access and maintain Sustainability-Linked Loans (SLLs) for undertaking performance improvements on 210 assets of their portfolio (totalling c.£1.4bn GAV), aligned to their ESG strategy and net zero pathway.
Prior to its merger with LondonMetric Property in 2024, LXi REIT focused on the delivery of long-term, secure, inflation-linked income to investors. They selectively invest in commercial property assets let, or pre-let, on long inflation-linked leases to a wide range of strong tenant covenants across a diverse range of property sectors. The portfolio holds 350 individual property investments across 13 market sectors. They have both landlord-controlled and tenant-controlled assets (assets that are on full repairing and insuring (FRI) leases).
The challenge here was to develop key performance indicators (KPIs) for 210 assets that were all FRI assets. The tenants ranged from leading hotel chains, pubs, childcare nurseries, retail stores, garden centres and theme parks. Typically, SLL KPIs are based on EPC improvements or energy and carbon reductions for landlord-controlled assets, but these could not be formulated for tenant-controlled FRI assets.
Greengage reviewed the Loan Market Association’s Sustainability Linked Loan Principles to thoroughly understand the requirements of developing KPIs and sustainability performance targets. We developed ways of formulating KPIs where performance improvements can be demonstrated by LXi REIT on FRI assets where they do not have direct control.
LMA’s Sustainability Linked Loan Principles establishes a recommended framework to articulate the fundamental characteristics of SLLs. SLLs aim to support a borrower’s efforts in improving its sustainability profile over the term of the loan. One of the prerequisites for developing the KPIs was that they must be relevant, core and material to the borrower’s overall business. We hence based the KPIs on LXi REIT’s ESG strategy and net zero pathway and this also served as a guidance document to determine the level of ambition in formulating Sustainability Performance Targets (SPTs) for each KPI. Additionally, the KPIs focussed on a diversity of measures rather than just focussing on the ‘E’ of the ESG.
As we developed these KPIs and SPTs, we worked very closely with the bank’s SLL co-ordinator and members of the LXi REIT’s ESG Committee to reach an agreement where the KPIs and targets are actionable, verifiable and in the best interest of LXi REIT in order to reach their net zero carbon goals. Our developed KPIs and SPTs were also appreciated by the bank, where their experience dealing with borrowers with FRI assets was limited.
Testimonial
“We actively seek sustainable finance to support our decarbonisation efforts, but equally appreciate the challenges that come with the lack of operational control over our portfolio. We recognise Greengage as a sustainability expert with whom we share a passion for real and measurable change, and we are grateful for their support with this innovative, FRI-focused structuring.”
Barbora Melezinkova – Head of ESG for LXi REIT plc
