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Fully hedged debt protects indexed rent growth

Supermarket Income REIT 9 November 2022 Update
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Supermarket Income REIT

Fully hedged debt protects indexed rent growth

Company update

Real estate

9 November 2022

Price

104p

Market cap

£1,290m

Net debt (£m) at 30 June 2022

297.3

Net LTV at 30 June 2022

32.1%

Shares in issue

1,241.8m

Free float

99.5%

Code

SUPR

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(1.4)

(17.3)

(13.1)

Rel (local)

(6.0)

(14.5)

(9.3)

52-week high/low

133p

96p

Business description

Supermarket Income REIT, listed on the Premium Segment of the London Stock Exchange, invests in supermarket property, primarily let to leading UK supermarket operators, on long, inflation-linked leases. The investment objective is to provide an attractive level of income, with the potential for capital growth, with a 7–10% pa total shareholder return target over the medium term.

Next events

H123 period end

31 December 2023

Analyst

Martyn King

+44 (0)20 3077 5745

Supermarket Income REIT is a research client of Edison Investment Research Limited

The continued strong advance in Supermarket Income REIT’s (SUPR’s) portfolio in the past year has increased diversification and is generating economies of scale. This was reflected in the 50% uplift in FY22 earnings and increased, fully covered DPS. Supported by indexed rent increases, we forecast continuing positive, dividend-driven, accounting returns, despite higher debt costs, now fully fixed, and a pause in acquisitions.

Year end

Rental income (£m)

EPRA
earnings (£m)

EPRA EPS*
(p)

NAV**/
share (p)

DPS
(p)

P/NAV
(x)

Yield
(%)

06/22

72.1

57.4

5.9

115

5.94

0.90

5.8

06/23e

97.3

71.7

5.8

113

6.00

0.92

5.8

06/24e

103.1

70.9

5.7

115

6.00

0.89

5.8

06/25e

107.1

74.2

6.0

118

6.00

0.87

5.8

Note: *EPRA EPS is normalised, excluding gains on revaluation and other non-recurring items. **NAV is EPRA net tangible assets throughout this report.

All drawn debt now fixed/hedged

FY22 acquisitions contributed for just a part of the year and continued into early FY23, together with indexed rent growth, providing a tailwind for performance. With the cost of all drawn debt now fixed/hedged at a blended 2.6%, earnings growth is protected from further interest rate rises, although hedging costs will reduce FY23 NAV by a one-off 2.8p per share. With asset yields yet to adjust to increased capital costs, we expect acquisitions to pause, until interest rates begin to decline and/or yields widen. Selective acquisitions are possible but not forecast, and we assume that cash returned from the c £190m JV in mid-2023 will be used to repay debt. By FY25, our EPRA EPS forecast is reduced by 5% (with a slight dip in FY24 as the JV contribution drops out), and we assume a flat DPS after FY23 to maintain a high level of cover. Hedging costs and asset yield widening limit forecast NAV growth.

A structurally supported sector

SUPR’s investment proposition is based primarily on robust and visible income growth from long, predominantly upward-only, inflation-linked leases with strong tenants. Capital growth has also benefited from asset yield tightening but rising government bond yields make this less certain. SUPR focuses on high-quality omnichannel supermarkets (combining in-store and online fulfilment), the fastest-growing segment of the grocery market. The non-discretionary nature of grocery sales has historically supported the sector in an inflationary environment and operators continue to mitigate input cost pressures through price increases. Although operator margins have tightened, cash flow is strong and rents are a small share (c 4%) of store turnover. Capped rent uplifts (typically at c 4%) provide visible growth for SUPR and increased affordability for tenants.

Valuation: Well-supported income visibility

Dividends have increased each year since listing in 2017 and returns have been consistently positive, in line with its 7–10% pa target. Its FY23 DPS target of 6.0p represents a yield of 5.8%, similar to its level at the peak of pandemic uncertainty. The c 10% discount to NAV compares with an average 5% premium since IPO.

Fully hedged debt protects indexed rent growth

This note provides an update to our March outlook note, which covers SUPR’s strategy, historical performance and opportunities within the supermarket property sector in greater detail. We focus on the implications for SUPR and its tenants from the sharp increase in inflation and interest rates, as well as the recent FY22 results and subsequent developments.

Strong recent growth with interest rate risks now fully hedged

During FY22, IFRS rental income increased c 50% to £72.1m, driven by acquisitions and mostly inflation-linked rent uplifts. On a like-for-like basis, rents grew by 3.7%. EPRA earnings increased by 56% to £57.4m or 5.9p per share (FY21: 5.6p). DPS of 5.94p (+1.4%) was 1.08x covered by EPRA earnings1 and the FY23 DPS target was increased by 1% to 6.0p. Including net property gains of £52.9m (both from the direct portfolio and SUPR’s share of JV gains), IFRS net earnings were £110.3m. For the direct portfolio, like-for-like valuations increased in line with rental growth. EPRA NTA per share increased 7% to 115p and, including DPS paid, the EPRA NTA total return was 12.5%.

  Calculated as EPRA earnings of c £57.4m divided by total dividends paid of £53.2m.

The FY22 rental income did not fully capture the impact of acquisitions during the year and since. Since the beginning of FY22, SUPR has completed two oversubscribed equity placing programmes, raising c £507m (gross) and has deployed c £682m to acquire 18 additional assets, at a blended net initial yield of 4.9%, adding scale and diversification. It has grown to be the largest UK landlord of omnichannel supermarket stores and its directly owned portfolio now comprises 50 supermarkets, valued at c £1.8bn, with annualised contracted rent of c £96m reflecting a net initial yield of 4.6%. The weighted average lease term to expiry is c 15 years. Indirectly, the company has an economic interest in 26 supermarkets comprising the Sainsbury’s Reversion Portfolio. Following the agreed acquisition by Sainsbury’s of 21 of the stores, SUPR expects its value to reach c £190m, a c 1.7x multiple on purchase price. The prospect of cash returns from around the middle of 2023 provides significant flexibility in balance sheet and investment strategy.

With c 81% of the directly owned portfolio benefiting from upward-only, index-linked rent reviews (subject to floors and caps), SUPR provides significant inflation protection. However, since the latter part of FY22, rising interest rates have had a negative impact on borrowing costs. Around 60% of the cost of end-FY22 drawn borrowings was fixed or hedged, but after that date the company took the decision to fix all its interest rate exposure through a new swap arrangement. As at 21 September 2022 (the reporting date for the FY22 results), 100% of drawn debt was fixed/hedged, at a blended interest cost of c 2.6%.2 The cost of acquiring the hedges was £35.2m, representing a c 2.8p reduction in EPRA NTA per share, to be reflected in the H123 balance sheet.

  Since 21 September 2022, SUPR has drawn on additional borrowing to fund the £84.0m (before costs) acquisition of a Tesco supermarket, an Iceland Food Warehouse and complementary non-grocery units in Bradley Stoke, Bristol. In line with its intention of minimising interest rate risk in the current volatile market, we expect the floating rate funding will also have been hedged and assume this to be on similar terms to the above. Our forecasts assume a fixed interest cost of 2.6% and an additional £8.0m of hedging costs (c 0.6p per share).

Although the cost of capital has increased across the sector, investment demand has, until recently, remained strong, supported by the visible long-term cash flow that the sector provides. Transaction activity has reduced but there are no clear signs that vendors are yet to meaningfully adjust their price expectations. As a result, we assume no further acquisitions3 and that the c £190m cash returns from the JV are used to repay borrowings. However, if interest rates decline through 2024, as implied by market expectations and/or acquisition yields widen sufficiently, the acquisition of operationally and strategically attractive assets is a possibility. SUPR’s own cost of capital should benefit from the FY22 migration of its shares to the premium segment of the Main Market of the London Stock Exchange, followed by inclusion in the UK 250 and EPRA Nareit indices, and the award of an Investment Grade credit rating.

  Other than the c £300m (before costs) of acquisitions announced since end-FY22. We had previously assumed £500m in total for FY23 and £300m in FY24 as the cash receipts of the JV were reinvested on a geared basis.

Supermarket property is structurally supported

Given the non-discretionary nature of most grocery sales, supermarket operators have demonstrated an ability to mitigate input cost pressures through price increases, a necessary inevitability of the tight margins at which they operate within a highly competitive retail market. Annual UK grocery inflation reached 12.4% in September.4 While operator margins have tightened, rent costs account for only a small proportion of store revenues, for the SUPR portfolio c 4%. Meanwhile, sector cash flows remain strong, and the large operators continue to represent very strong lease covenants. Upwards only, index-linked rent uplifts are typically capped rents at c 4%, a level at which, in the current inflationary environment, the company continues to benefit from visible income growth while rents become more affordable to operators, and the potential for stores to become ‘over-rented’ is diminished.

  Source: SUPR/Kantor.

Within the grocery market, in-store sales retain the largest share of sales, but the trend towards online sales (click and collect and home delivery) continues. Over the last three years (spanning the period before and after lockdowns), online grocery sales are up 73% and market share has increased from 9% to 12%, with a peak at 15% during the lockdown. The £10bn increase in online sales value materially exceeded that of the UK discounter distribution channel.5 Within the online delivery channel, omnichannel (combining in store and online fulfilment) has continued to increase share, now accounting for more than 80% of all online orders. SUPR is in the strong position of focusing on both the largest market segment (in store) and the fastest growing (omnichannel). While SUPR does not benefit directly from this, it underwrites the attractiveness and longevity of its stores to operators and asset values. That said, with a portfolio net initial yield of 4.6%, there is no obvious sign that SUPR has fully benefited from this, a potential defensive characteristic if yields do widen across the market. More generally, supermarket property has historically offered relative stability compared with the broad UK commercial property market, and current market average net initial yields of c 4.5% are above the IPD All Property yield of 4.0%.

  Source: SUPR/IGD.

Estimate changes

Our revised forecasts reflect no material change in underlying operational performance. Rental income is materially reduced by lower assumed acquisitions than previously, but the EPRA earnings impact in FY22 is offset (more than offset in FY23 and slightly in FY24) by lower borrowings and a reduced running cost of debt. The average running cost of SUPR’s drawn borrowing is now fixed/hedged at a lower level than we previously expected despite market rates having increased. The further increase in interest rates forecast by the market6 will have no impact on SUPR or our forecasts.

The SONIA rate, which closely tracks the Bank of England base rate, is currently c 3%. The market expectation for SONIA/base rate, reflected in the SONIA forward curve, has recently been volatile, indicating a peak at between 5% and 6% towards the middle of 2023 (and is currently at the lower end of this range) before declining gently to a long-term rate of c 3–4%.

As was similarly reflected in our previous forecasts, the falling away of the JV contribution in FY24 is a drag on reported EPRA earnings and we have pegged DPS at the FY22 level of 6.0p to maintain a high level of dividend cover. The £35.2m cost of hedging has transferred some of the impact of higher interest rates to the balance sheet, reducing EPRA NTA per share in FY23, with our expectation that property values will not keep pace with indexed rental growth also having a negative impact. The latter is reflected in a c 35bp yield widening over the forecast period.

Exhibit 1: Summary of forecasts

New estimate

Previous estimate

Change

Change %/percentage points

£m, unless otherwise stated

FY23e

FY24e

FY25e

FY23e

FY24e

FY25e

FY23e

FY24e

FY25e

FY23e

FY24e

FY25e

Rental income

97.3

103.1

107.1

100.0

122.7

130.2

(2.8)

(19.5)

(23.0)

-3%

-16%

-18%

Expenses

(16.4)

(16.8)

(17.3)

(15.5)

(16.0)

(16.7)

(0.9)

(0.7)

(0.5)

6%

5%

3%

Share of JV EPRA earnings

9.0

0.0

0.0

9.2

0.0

0.0

(0.2)

0.0

0.0

Net finance costs

(18.1)

(15.5)

(15.7)

(25.3)

(36.2)

(35.3)

7.1

20.7

19.6

-28%

-57%

-56%

EPRA earnings

71.7

70.9

74.2

68.5

70.5

78.2

3.2

0.5

(4.0)

5%

1%

-5%

EPRA EPS (p)

5.8

5.7

6.0

5.5

5.7

6.3

0.3

0.0

(0.3)

5%

0%

-5%

DPS (p)

6.0

6.0

6.0

6.0

6.1

6.3

0.0

(0.1)

(0.3)

0%

-2%

-4%

Dividend cover (x)

100%

95%

100%

92%

94%

101%

734

163

(156)

Gross borrowing

549.0

509.5

510.0

840.0

970.5

971.0

(290.9)

(460.9)

(460.9)

-35%

-47%

-47%

LTV

28%

26%

25%

31%

39%

38%

(221)

(1,355)

(1,280)

EPRA NTA per share (p)

113

115

118

117

120

126

(4.5)

(5.3)

(8.4)

-4%

-4%

-7%

EPRA NTA total return

3.0%

7.6%

7.7%

6.7%

8.0%

10.2%

(372)

(43)

(243)

Source: Edison Investment Research

Acquisition activity likely to pause in the near term

SUPR’s total debt facilities are c £862m and we forecast that c £690m of this has been drawn (including funding for the £84m Bradley Stoke acquisition), giving SUPR significant funding headroom. However, undrawn, unhedged floating rate debt is priced at a c 1.5–2.0% margin (depending on the facility) over the SONIA market reference rate and, if this develops in line with consensus expectations, the spread between marginal borrowing costs and typical current acquisition yields will become negative. While this persists, we expect SUPR to take a highly selective approach to acquisitions, and it seems reasonable for us to assume none. Over time, it seems likely that asset yields will widen and borrowing costs decline. Moreover, SUPR has a record of being able to source operationally strong assets at attractive prices, including where it has identified value-add opportunities (eg through lease regears). Its strong liquidity position and ability to transact quickly may prove advantageous in negotiations with vendors. In addition to available debt facilities, we forecast an LTV of c 25% through to FY25, well below SUPR’s medium-term target of 25–30% target on a fully invested basis.

While opportunities for near-term portfolio growth are substantially dependent on the evolution of market conditions, we note that in addition to being a highly successful investment, the JV cash receipts provide significant flexibility in the management of SUPR’s balance sheet and acquisition strategy.

Highly successful JV provides significant strategic flexibility

Since end-FY22, SUPR has agreed the purchase price for the 21 (of 26) stores in its JV portfolio (discussed in detail in our March outlook note and summarised in the footnote below),7 which Sainsbury’s had earlier exercised its option to acquire. Including the agreement of new leases on four of the remaining stores, SUPR estimates that the eventual value of its investment in the JV will reach c £190m8 (a 1.7x return on the purchase cost). The purchase by Sainsbury’s is expected to complete between March and July 2023, resulting in cash distributions to SUPR.

  In May 2020, SUPR formed a 50:50 joint venture with British Airways Pension Fund (BAPF) to acquire from British Land an initial 25.5% stake in one of the UK’s largest portfolios of supermarket properties (the Sainsbury’s Reversion Portfolio) for £102m (excluding acquisition costs). In February 2021, the JV acquired a further 25.5% stake in this portfolio from Aviva for £115m (excluding acquisition costs). The portfolio comprised 26 predominantly omnichannel stores leased to Sainsbury’s until 2023. In September 2021 and January 2022, Sainsbury’s exercised its options to acquire 21 of the stores and the acquisition price has now been formally agreed at £1,040m, based on an externally assessed market valuation. Of the five assets that have not as yet been acquired by Sainsbury’s, new leases have been agreed on four and SUPR indicates that a fifth asset will be sold. The JV partners are yet to decide on whether the remaining four assets will be refinanced or, as we expect, sold.

  The end-FY22 carrying value of SUPR’s investment in the JV was £177.1m and included an initial externally estimated price for the assets sold. The eventual uplift to c £190m expected by SUPR includes additional net income to lease expiry and an adjustment for the formally agreed price to be paid by Sainsbury’s for the assets acquired.

SUPR’s investment case for its participation in the JV was based on its assessment of the quality of the portfolio9 and its expectation that, as a result, Sainsbury’s would remain committed to many of the stores. The investment has been highly successful, generating annualised returns above SUPR’s 8–10% target range from a combination of asset revaluation and the running yield on the portfolio.

  The quality and trading performance of the portfolio is indicated by the fact that SUPR estimates that it represents c 4% of the total Sainsbury’s estate (by floor space) but generates c 7% of annual sales.

We forecast SUPR’s consistent record of positive accounting returns to continue

SUPR’s medium-term target of a 7–10% pa return is the product of rental growth, supporting dividend growth and, to the extent that property valuation yields do not change, is capitalised into asset value and NAV growth, with the additional benefit of gearing.

The accounting total return (change in NAV adjusted for dividends paid) has been consistently positive since the company listed in July 2017, averaging 8.1% pa and within the target range. Dividends per share have increased each year and represent c 60% of the total return. Annualised returns have steadily increased over the period, benefiting from swift deployment of capital resources, acquiring well-performing assets, and increased scale and diversification.

We expect the sharp rise in inflation and market interest rates, increasing the cost of capital, to have a negative impact on returns in the short term but for these to remain positive, despite reduced gearing, particularly in FY24 and FY25. FY23 returns will be held back by the costs of interest rate hedging and our expectation that property yields will widen (a drag on property valuations). Although we have assumed no growth in DPS paid in the period we expect it to be the driver of an average annual accounting return of 5.7% for the three years FY23 to FY25.

Across the commercial property sector, income returns have historically shown less volatility than capital values, which have displayed material swings. Supermarket property returns have historically been less volatile than mainstream sectors, reflecting predictable cash flows from strong tenant covenants based on the non-discretionary nature of most grocery sales. With government bond yields significantly higher than at the start of the year,10 there is a widespread expectation that the widening of property valuation yields (decrease in values) that is already apparent across much of the UK commercial property sector will spread. Our forecasts allow for a c 0.35% widening of the valuation yield on SUPR’s portfolio and, in this context, we expect a relatively modest NAV per share progression despite like-for-like rental growth.

  The yield on the 10-year UK government gilt has increased from around 1% at the start of the year to around 3.5% having recently peaked at around 4.5%.

The end-FY22 EPRA ‘topped-up’ net initial yield of the SUPR portfolio was 4.6%. In addition to the yield widening reflected in our forecasts, we estimate that a 10-basis point increase/decrease in yield would decrease/increase FY22e NAV per share by c 3.1p.

Exhibit 2: NAV* total return record and Edison forecasts

FY18**

FY19

FY20

FY21

FY22

FY18-FY22

FY23e

FY24e

FY25e

FY22-FY25

Opening NAV per share (p)

97

96

97

101

108

97

115

113

115

115

Closing NAV per share (p)

96

97

101

108

115

115

113

115

118

118

DPS paid (p)

4.1

5.6

5.8

5.9

5.9

27.2

6.0

6.0

6.0

18.0

Dividend return

4.3%

5.8%

6.0%

5.8%

5.5%

28.1%

5.2%

5.3%

5.2%

15.6%

Capital return

-1.1%

0.7%

4.8%

6.3%

7.0%

18.7%

-2.2%

2.3%

2.5%

2.6%

NAV total return

3.4%

6.6%

10.7%

12.1%

12.5%

46.9%

3.0%

7.6%

7.7%

18.2%

Annual average return

8.1%

5.7%

Source: Supermarket Income REIT historical data, Edison Investment Research forecasts. Note: *NAV is EPRA NTA. **From 21 July 2017.

Summary of FY22 results and pro-forma developments

In this section we provide an overview of the FY22 results and subsequent events that have further increased annualised rental income, enhanced debt facilities, fixed debt costs and crystalised additional value within SUPR’s JV.

During FY22, SUPR raised £506.7m (gross) in two oversubscribed equity placing programmes and acquired 12 supermarket assets with an aggregate purchase price of £381.0m (before costs). Portfolio value increased by £423m to £1.57bn, including 3.7% like-for-like growth, and reflected a blended net initial yield (NIY) of 4.6%. Acquisitions and asset management maintained the weighted average unexpired lease term at 15 years. The period-end annualised contracted rent roll increased c 34% to £80m11 including like-for-like growth from completed rent reviews of 3.7%. Exhibit 3 provides a summary of financial performance.

  On an annualised IFRS basis. Passing cash rent at period end was c £77m.

Exhibit 3: Summary of FY22 financial performance

£m unless stated otherwise

FY22

FY21

FY22/FY21

Edison FY22e

Total net rental income

72.1

47.9

50.4%

71.0

Administrative & other expenses

(13.9)

(9.3)

50.5%

(13.3)

Operating profit before investment property change in fair value

58.2

38.7

50.4%

57.8

Net finance expense

(13.0)

(8.5)

52.5%

(11.5)

Share of income from joint venture (exc. revaluation gains)

12.2

6.6

84.5%

12.1

EPRA earnings

57.4

36.8

56.1%

58.3

Negative goodwill

0.0

3.3

0.0

Change in fair value of investment properties

21.8

36.3

23.2

Change in fair value of investment properties within JV

(6.0)

5.6

31.0

Gain on disposal of JV properties

37.1

0.0

0.0

IFRS earnings

110.3

82.0

34.6%

112.5

Period end number of shares

1,239.9

810.7

52.9%

1,239.9

Average number of shares

975.2

652.8

49.4%

976.7

Basic & diluted IFRS EPS (p)

11.3

12.6

11.5

EPRA EPS (p)

5.9

5.6

4.5%

6.0

DPS declared (p)

5.94

5.86

1.4%

5.9

EPRA basis dividend cover (x)

1.08

1.04

1.10

EPRA cost ratio

16.5%

16.8%

17.5%

Gross assets

1,808.0

1,302.6

1,847.3

Investment properties

1,561.6

1,148.4

1,563.0

Net assets

1,432.5

871.3

1,431.3

EPRA NTA per share (p)

115

108

115

EPRA NTA total return

12.5%

12.1%

12.7%

Net balance sheet debt

(297.3)

(390.1)

(306.9)

Loan to value ratio (LTV)

19.0%

34.0%

18.4%

Source: Supermarket Income REIT, Edison Investment Research

In particular we note:

IFRS rental income recognised during FY22 increased 50% to £72.1m.

Administrative costs, supporting the growth of the business and including inflationary uplifts, increased at a similar rate to rental income. The EPRA cost ratio nonetheless improved to 16.3% (excluding direct vacancy costs) from 16.5%, before a full period income contribution from the assets acquired during the year.

Net finance expense increased with additional borrowing to part-fund portfolio growth and, towards the end of the year, an increase in borrowing costs as interest rates rose.

EPRA earnings increased 56% to £57.4m or 5.9p per share (FY21: 5.6p).

DPS of 5.94p (+1.4%) was 1.08x covered by EPRA earnings. The FY23 DPS target was increased by 1% to 6.0p per share.

Including net property gains £52.9m, IFRS net earnings were £110.3m.

EPRA NTA per share was 115p.

Net LTV was 19.0% before the post-H123 activity detailed below and we estimate c 34% currently, at the lower end of the 30–40% range targeted by the company.

Subsequent events

Since the end of FY22, SUPR has acquired an additional six supermarket assets for an aggregate £300m (before costs) at a blended NIY of 5.2%, adding c £16m to annualised contracted rent roll.

Just after the FY22 period end, SUPR entered into its first unsecured debt financing with a syndicate of banks, providing additional, more flexible debt funding. This was made possible by the increased scale and diversification of SUPR’s portfolio and was additionally supported by its recently awarded Investment Grade credit rating, itself a reflection of strong underlying sector fundamentals. The proceeds of the £412m were partly used in part to refinance existing secured commitments and provided £157m of net additional debt capital. The new unsecured facility was initially priced at a margin of 1.5% over SONIA, but SUPR has subsequently fixed the interest cost at c 2.8%, through new swaps, on £381m of the £412m total, for an average four years.

The agreement with Sainsbury’s also came after the FY22 period end, agreeing the sales price (at just over £1bn) on the 21 (of 26) stores to be sold to Sainsbury’s, agreeing new 15-year leases on four more and increasing SUPR’s estimate of the investment value of its share of the JV to c £190m.

Valuation at historically attractive level

Based on the company’s FY23 target aggregate DPS of 6.0p, the prospective yield is 5.8%, while the shares are now trading at a c 8% discount to end-FY22 EPRA NTA per share compares with an average 5% premium since listing. The current ratios are similar to those at the peak of pandemic uncertainty in 2020 which proved to be an attractive entry point, reflected in subsequent total accounting returns.

Exhibit 4: Price to NAV and dividend yield history since listing

Source: Refinitiv prices as at 8 November 2022. Note: Company published NAV and DPS data.

In Exhibit 5 we show a comparison of SUPR with a group of other property companies that focus on income returns derived from long leases. On a one- and three-year basis, SUPR’s share price has outperformed the average of this peer group and the broad UK property sector. Compared with the group average, it has a lower yield and higher P/NAV ratio. Its predominantly RPI-linked rent growth provides investors with considerable visibility of income with protection against inflation, while the strength of its tenant covenant has been successfully tested and even enhanced during the pandemic and should prove resilient in the inflationary conditions that have followed. The non-discretionary nature of grocery sales has historically supported the sector in an inflationary environment and operators continue to mitigate input cost pressures through price increases.

Exhibit 5: Valuation and performance summary of long-lease REITS

Price
(p)

Market cap
(£m)

P/NAV*
(x)

Trailing yield** (%)

Share price performance

One month

Three months

One year

Three years

Assura

56

1,659

0.92

5.4

4%

-18%

-23%

-24%

Impact Healthcare

103

416

0.89

6.3

2%

-13%

-13%

-6%

Civitas Social Housing

60

364

0.54

9.3

-6%

-25%

-36%

-29%

LXi REIT

122

2,088

0.85

4.9

-2%

-17%

-17%

-3%

Primary Health Properties

111

1,486

0.95

5.8

0%

-24%

-28%

-21%

Secure Income

461

1,494

1.09

3.4

0%

0%

13%

8%

Target Healthcare

87

541

0.78

7.8

-3%

-25%

-27%

-22%

Triple Point Social Housing

67

270

0.61

7.9

-7%

-27%

-32%

-24%

Tritax Big Box

138

2,572

0.62

4.9

2%

-29%

-40%

-9%

Average

0.80

6.2

-1%

-20%

-22%

-14%

Supermarket Income

103

1,273

0.89

5.8

-6%

-19%

-14%

-2%

UK property sector index

1,300

2%

-24%

-32%

-29%

UK equity market index

3,927

1%

-5%

-6%

-3%

Source: Company data, Refinitiv. Note: *Based on last reported EPRA NAV/NTA. **Based on last 12 months DPS declared. Priced at 8 November 2022.

Exhibit 6: Financial summary

Year ended 30 June (£m)

2020

2021

2022

2023e

2024e

2025e

INCOME STATEMENT

Rent receivable

25.5

46.2

69.7

94.5

100.3

104.3

Rent smoothing adjustment

0.9

2.0

2.7

2.8

2.8

2.8

Net service charge expense

0.0

(0.2)

(0.3)

0.0

0.0

0.0

Total rental income

26.4

47.9

72.1

97.3

103.1

107.1

Administrative & other expenses

(5.2)

(9.3)

(13.9)

(16.4)

(16.8)

(17.3)

Operating profit before investment property change in fair value

21.2

38.7

58.2

80.9

86.4

89.9

Change in fair value of investment properties

13.1

36.3

21.8

10.6

35.5

36.3

Share of profit of JV

0.5

15.5

43.3

13.0

0.0

0.0

Negative goodwill

3.0

0.0

0.0

0.0

0.0

0.0

Operating profit/(loss)

37.7

90.5

123.3

104.5

121.9

126.2

Net finance expense

(4.9)

(8.5)

(13.0)

(18.1)

(15.5)

(15.7)

Profit/(loss) before tax

32.8

82.0

110.3

86.4

106.4

110.5

Tax

0.0

0.0

0.0

0.0

0.0

0.0

Profit/(loss) for the period

32.8

82.0

110.3

86.4

106.4

110.5

Adjust for:

Changes in fair value of investment property

(13.1)

(36.3)

(21.8)

(10.6)

(35.5)

(36.3)

Share of changes in fair value of JV investment property

(5.6)

(31.1)

(4.0)

0.0

0.0

Negative goodwill

(3.0)

(3.3)

0.0

0.0

0.0

0.0

EPRA earnings

16.8

36.8

57.4

71.7

70.9

74.2

EPRA cost ratio inc. direct vacancy costs

19.2%

16.8%

16.5%

17.5%

16.2%

16.1%

Closing number of shares (m)

473.6

810.7

1,239.9

1,241.8

1,241.8

1,241.8

Average number of shares in issue (m)

334.2

652.8

975.2

1,241.5

1,241.8

1,241.8

IFRS EPS (p)

9.8

12.6

11.3

7.0

8.6

8.9

EPRA EPS (p)

5.0

5.6

5.9

5.8

5.7

6.0

DPS declared (p)

5.80

5.86

5.94

6.00

6.00

6.00

Total EPRA earnings (£m)/Total dividends paid (£m)

84%

104%

108%

100%

95%

100%

EPRA NTA total return

10.7%

12.1%

12.5%

3.0%

7.6%

7.7%

BALANCE SHEET

Investment property

539.4

1,148.4

1,561.6

1,906.1

1,944.4

1,983.5

Associate

56.1

130.3

177.1

50.1

0.0

0.0

Other non-current assets

56.1

131.3

193.1

109.3

59.2

59.2

Total non-current assets

595.5

1,279.7

1,754.7

2,015.4

2,003.6

2,042.6

Trade & other receivables

1.7

3.1

1.86

5.0

5.2

5.4

Cash & equivalents

20.4

19.6

51.20

6.6

11.2

9.0

Other current assets

(0.0)

0.2

0.28

0.3

0.3

0.3

Total current assets

22.1

23.0

53.35

11.9

16.7

14.7

Deferred rental income

(5.2)

(12.1)

(16.4)

(16.4)

(16.4)

(16.4)

Current tax liabilities

0.0

0.0

0.0

0.0

0.0

0.0

Trade &other payables

(6.4)

(8.4)

(10.7)

(15.1)

(15.6)

(16.2)

Total current liabilities

(11.6)

(20.4)

(27.0)

(31.4)

(32.0)

(32.6)

Bank borrowings

(126.8)

(409.7)

(348.5)

(549.0)

(509.5)

(510.0)

Interest rate derivatives

(2.0)

(1.2)

0.0

0.0

0.0

0.0

Total non-current liabilities

(128.8)

(410.9)

(348.5)

(549.0)

(509.5)

(510.0)

Net assets

477.2

871.3

1,432.5

1,446.9

1,478.8

1,514.7

IFRS NAV per share (p)

101

107

116

117

119

122

EPRA NTA per share (p)

101

108

115

113

115

118

CASH FLOW

Net cash from operations

26.9

42.8

63.0

79.3

84.0

87.5

Acquisition & investment in investment property

(157.3)

(570.0)

(388.7)

(331.1)

0.0

0.0

Investment in associate

(52.6)

(58.7)

(3.5)

140.0

50.1

0.0

Other investing activity

0.0

(0.9)

(10.6)

0.0

0.0

0.0

Net cash from investing activity

(209.9)

(629.5)

(402.8)

(191.1)

50.1

0.0

Share issuance (net of costs)

234.8

345.6

496.4

0.0

0.0

0.0

Debt drawn/(repaid)

(16.2)

284.7

(61.1)

200.0

(40.0)

0.0

Interest paid and other financing costs

(5.6)

(9.3)

(12.7)

(60.8)

(15.0)

(15.2)

Dividends paid

(19.6)

(34.9)

(51.1)

(72.0)

(74.5)

(74.5)

Net cash from financing activity

193.4

586.0

371.5

67.2

(129.5)

(89.7)

Change in cash

10.5

(0.8)

31.6

(44.6)

4.6

(2.2)

Opening cash

9.9

20.4

19.6

51.2

6.6

11.2

Closing cash

20.4

19.6

51.2

6.6

11.2

9.0

Debt as per balance sheet

(126.8)

(409.7)

(348.5)

(549.0)

(509.5)

(510.0)

Net debt

(106.4)

(390.1)

(297.3)

(542.4)

(498.3)

(501.0)

LTV

19.7%

34.0%

19.0%

28.5%

25.6%

25.3%

Source: Supermarket Income REIT historical data, Edison Investment Research forecasts

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Copyright: Copyright 2022 Edison Investment Research Limited (Edison).

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New Zealand

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United Kingdom

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60325 Frankfurt

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London +44 (0)20 3077 5700

280 High Holborn

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United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

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Level 4, Office 1205

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NSW 2000, Australia

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This report has been commissioned by Supermarket Income REIT and prepared and issued by Edison, in consideration of a fee payable by Supermarket Income REIT. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2022 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

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United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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