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Funded for identified further growth

Supermarket Income REIT 6 July 2022 Update
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Supermarket Income REIT

Funded for identified further growth

Update post equity raise

Real estate

6 July 2022

Price

118.5p

Market cap

£1,469m

Net debt (£m) as at 31 December 2021

454.0

Net LTV as at 31 December 2021

32.1%

Shares in issue

1,239.9m

Free float

100%

Code

SUPR

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(7.8)

(8.9)

0.0

Rel (local)

(0.6)

0.0

6.0

52-week high/low

133p

116p

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

FY22 results

Exp. Sept. 2022

Analyst

Martyn King

+44 (0)20 3077 5745

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

In this note, we provide an update on Supermarket Income REIT’s (SUPR’s) continuing growth prospects following completion of the equity raise in April and entry into the FTSE 250 and EPRA NAREIT stock indices. Income growth is supported by acquisitions, mostly index-linked rents, strong tenant covenants and positive structural trends in the market. We expect a continuation of progressive DPS despite increasing debt funding costs.

Year end

Rental income (£m)

EPRA earnings (£m)

EPRA EPS*
(p)

NAV*/share (p)

DPS
(p)

P/NAV
(x)

Yield
(%)

06/21

47.9

36.8

5.6

108

5.86

1.10

4.9

06/22e

71.0

58.3

6.0

115

5.94

1.03

5.0

06/23e

100.0

68.5

5.5

117

6.00

1.01

5.1

06/24e

122.7

70.5

5.7

120

6.10

0.98

5.1

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

Strong investment proposition

Strong investor demand for the late April £300m, upsized equity raise, the recent award of an Investment Grade credit rating, and SUPR’s entry into the unsecured debt market, are all evidence of the strength and appeal of its business model. Ahead of the equity raise SUPR’s strong pipeline of near-term investment opportunities amounted to c £270m, at an average c 5% net initial yield, with a longer-term pipeline of c £440m. SUPR has a strong track record of swift capital deployment, and we expect this to continue despite the market-driven increase in debt funding costs. Our updated forecasts include positive acquisition effects, partly offset by inflation-led increases in administrative and debt costs. With more shares in issue, we forecast lower EPRA EPS (c 10%) but continue to expect DPS and NAV growth, with the former fully covered by FY25.

Visible income and growth potential

The attraction of SUPR’s investment proposition is based on robust and visible income growth with further potential for capital growth. This has been the basis for the sector’s long track record of positive total returns. SUPR’s portfolio of high-quality omnichannel supermarkets (combining in-store and online fulfilment) is let on long average leases, with predominantly upwards-only, inflation-linked rents, to strong tenant covenants. The non-discretionary nature of grocery sales has historically supported the sector in an inflationary environment. Omnichannel stores further benefit from the structural shift to online shopping, although this is yet to be fully reflected in asset values. Tenants continue to demonstrate their ability to mitigate supply chain cost pressures through price increases and although there are signs of margin pressure their cash flows remain robust.

Valuation: Well supported income visibility

Since listing in July 2017, SUPR has paid increasing dividends and has generated consistently positive returns in line with its 7–10% pa target. Its FY22 DPS target of 5.94p represents a yield of 5.0%, in line with a selected peer group of other long-income REITs and supporting the c 5% premium to end-H122 NAV.

Visible income and growth potential

This note provides an update on our outlook note published in March 2022, providing a detailed review of SUPR’s strategy and prospects.

Equity and debt capital increase

The offer that closed on 26 April 2022 resulted in £300m (gross) being raised by the issue of 247.9m new shares under SUPR’s existing placing programme and an additional £6.7m from the issue of 5.6m shares in a PrimaryBid offering, specifically targeting retail investors. As a result, the number of shares in issue increased by 253.5m or nearly 26%. The issue price of 121p represented a 7.1% premium to the 31 December 2021 (end-H122) EPRA NTA per share of 113p and a discount of 4.3% to the 126.5p share price immediately before the offer was announced. Of the 450m shares authorised under the placing programme that expires in October 2022, 22.6m remain available for issue.

The proceeds of the equity raise have initially been used to reduce outstanding drawn debt, but we expect these will be deployed during FY23 to fund acquisitions. The debt refinancing, announced on 4 July 2022, represents SUPR’s first unsecured financing and provides additional, more flexible debt funding and enhances the overall average debt average maturity1. It has been made possible by the increased scale and diversification of SUPR’s portfolio, the strong fundamentals of the sector and SUPR’s recently awarded Investment Grade credit rating. The proceeds of a new unsecured £412.1m unsecured credit facility with a syndicate of banks2 will be used in part to refinance £294m of existing secured commitments (of which £255m will be retired), providing £157m of additional debt capital. The new unsecured facility has a margin of 1.5% over SONIA and a weighted average term of six years (inclusive of uncommitted extension options). It consists of three tranches:

We estimate the overall weighted average debt maturity to be c 4.2 following the refinancing.

The syndicate comprises Barclays, Royal Bank of Canada, and Wells Fargo, all existing lenders to SUPR, as well as Bank of Scotland International.

a £250m seven-year revolving credit facility (RCF), comprising an initial five-year term and two one-year extension options;

a £100m five-year term loan, comprising an initial three-year term and two one-year extension options; and

a £62.1m three-year term loan, comprising an initial 18-month term with one 18-month extension option.

Significant pipeline of investment opportunities

Through its investment adviser (Atrato Capital) SUPR has built a strong record of swift capital deployment. This has been achieved by identifying a range of suitable assets ahead of capital raising, primarily off-market and at an advanced stage of due diligence or under exclusivity. By having a range of opportunities, its bargaining position is protected, and swift deployment has usually followed.

Ahead of the April 2022 equity issue, SUPR’s provided details of a strong pipeline of investment opportunities. As is normal, we would not expect its actual investment to completely match this pipeline, but it does provide confidence in the company’s ability to deploy its available capital in a timely fashion. The April pipeline comprised:

Assets with an aggregate value of c £150m under exclusivity.

Assets with an aggregate value of c £120m in an advanced stage of due diligence.

The above assets support physical and online sales channels with a weighted average unexpired lease term (WAULT) of 14 years and expected net initial yield of c 5%. Given the strength of SUPR’s pipeline, we are confident in its ability to deploy the proceeds but, as is normal, the particular assets that are acquired are likely to evolve.

A further pipeline of assets with an aggregate value of c £440m that meet SUPR’s strict investment criteria.

Following previous capital raises, SUPR has generally been able to deploy equity proceeds within three months and achieve full deployment, including associated debt capital, within six months. In the current rising interest rate environment, it is important that the company remains disciplined in its investment decision making to generate positive return for shareholders. Although this could cause a slight delay, we expect currently available capital to be deployed into £500m of acquisitions before the end of 2022 (by end-H123).

Deployment has begun

The acquisitions of the Chineham Shopping Park in Basingstoke, anchored to a top trading3 Tesco superstore, and an Asda supermarket in Carcroft, Doncaster, announced on 4 July 2022 for a combined £82.9m (before costs), are SUPR’s first since closing the equity raise in late April. The purchase prices reflect a combined net initial yield of 4.9%.

Source: Atrato Capital.

The omnichannel Tesco superstore on the Chineham site has a c 61k sq ft net sales area and operates as an online hub, supporting 13 home delivery vans and a dedicated click and collect facility in the car park. The site also includes an M&S Foodhall, an Iceland store and other complementary non-food tenants, collectively generating strong footfall. It has been acquired with a remaining lease term of 12 years and is subject to five-yearly open-market rent reviews.

The Ada supermarket at Carcroft, with a net sales area of c 46k sq ft is also an omnichannel store, supporting local online fulfilment through click and collect. The property has been acquired from Asda, which has operated on the site since the 1970s with the store being fully refurbished in 2019, under a sale and leaseback transaction. The new, 100-year lease is subject to five-yearly upwards-only rent reviews linked to CPI (capped at 2.5% with a floor at 0.0%).

Other recent transactions

During H122, SUPR acquired eight supermarket assets for an aggregate £243m (before acquisition costs) at an accretive net initial yield of 4.5% and average 16-year WAULT.

Ahead of the April equity raise, during H222 SUPR has announced the acquisitions of a further three supermarkets with a weighted average net initial yield of 4.8% and WAULT of 19 years for a total consideration of £128.3m (before acquisition costs). These comprise:

January 2022: Sainsbury’s in Washington and Asda in Cwmbran for £55.1m with a WAULT of 21 years. The Sainsbury’s has seven-yearly, upwards-only, RPI-linked rent reviews and the Asda has five-yearly, upwards-only, open market rent reviews.

January 2022: Tesco in Sheffield for £73.2m with a 17-year unexpired lease term and annual, upwards-only, RPI-linked rent reviews.

Included in the acquisitions above were two non-food, quick service restaurant units for a combined £2.5m (before acquisition costs).

The strong development of SUPR’s direct portfolio can be seen in Exhibit 1. By end-FY22, prior to the Chineham and Carcroft acquisitions, the direct investment portfolio comprised 41 stores with a valuation that we expect to be more than £1.5bn.

Exhibit 1: Direct portfolio investment*

H118

H218

H119

H219

H120

H220

H121

H221

H122

FY22e

Portfolio valuation (£m)

208

265

321

368

490

539

885

1,148

1,414

>1,500

Contracted rent roll (£m)

10.7

13.6

16.5

19.2

26.1

28.7

46.1

57.8

70.2

79.8

Number of stores

4

5

6

7

9

19

27

30

38

41

Net assets (£m)

113

177

321

230

328

477

692

871

1,115

Net LTV

44.5%

32.4%

43.0%

36.3%

32.4%

19.7%

27.0%

34.0%

32.1%

 

Source: Supermarket Income REIT, Edison Investment Research. Note: *Excludes SUPR’s beneficial interest in the Sainsbury’s Reversion Portfolio.

Inflation benefits and mitigation

Secure and robust income

Inflation-linked rental uplifts apply to 85% (76% RPI and 9% CPI) of passing rent.4 Although indexed rent uplifts are capped at an average c 4%, below the current level of inflation, SUPR nonetheless benefits from strong visibility of income growth, at a rate that maintains the affordability of rents for operators and compared with open market rent levels. Given the non-discretionary nature of most grocery sales, supermarkets have historically benefited from an inflationary environment, with their ability to mitigate supply chain cost pressures through price increases. We expect this to continue to be the case. Although it appears that operators are currently experiencing some margin pressures as grocery prices increase, including the effects of consumers ‘trading down’ to lower-cost alternatives and in some cases reducing the ‘volume’ of their shopping baskets, there are offsets such as eating more at home. Operator cash flow remains strong and rents affordable. The investment adviser estimates that store rents typically represent a relatively low share of store turnover and that market rent levels tend to track store turnover over the medium term. It estimates the average rent to turnover ratio across the portfolio is c 4%,5 which it believes indicates that rents remain highly affordable and while grocery inflation outstrips rent caps, this affordability should improve further.

Based on the H122 portfolio.

Based on Atrato Capital estimates of store trading.

Funding cost pressures

SUPR has a relatively high share of variable rate debt, the cost of which has risen noticeably in recent weeks. At end-H122, 44% of drawn debt was fixed/hedged (‘the hedge ratio’).6 SUPR’s hedging strategy, designed to mitigate the impact of significant increases in interest rates, targets a hedge ratio of 60% or more and we believe that the company had anticipated using the increased borrowing flexibility arising from its recent Investment Grade credit rating7 to increase this towards its target, including the introduction of fixed-rate, long-term, unsecured bond funding or private placements.8 SUPR considers that the strong rise in interest rates has for now significantly reduced the attractiveness of fixing or hedging the cost of more of its debt but, understandably, is watching market developments closely. Implied market expectations are that the benchmark SONIA rate will moderate in the coming months.

Based on total debt facilities rather than drawn debt the H122 hedge ratio was 30%.

The Investment Grade credit rating of BBB+ (stable outlook) awarded by Fitch Ratings in February 2022.

Around 30% of total debt facilities, including undrawn amounts, are currently fixed/hedged.

The refinancing announced on 4 July 2022, at a 1.5% margin over SONIA, has a positive impact on SUPR’s average portfolio margin but this is more than outweighed by the upwards move in SONIA. Based on the current level and structure of borrowings we expect the hedge ratio to have increased to c 50% although based on total debt facilities rather than drawn debt facilities, we expect the hedge ratio to be slightly lower than previously. Including amortisation of loan arrangement fees, the weighted average finance cost was c 2.5% pa at end-H122 compared with the running interest cost of c 1.9% pa. Given the subsequent increase in market interest rates, we estimate the current running cost of interest to have increased to c 3.0%, with a total average finance cost of c 3.5%.

Acquisition opportunities despite rise in interest rates

Based on a loan to ratio (LTV) of 40%, the equity yield of c 5.0%, the average cost of debt and adviser fees at a marginal rate of 0.65% of NAV, we estimate a ‘break-even’ acquisition yield of 4.8%. Based on our assumed acquisition yield of 5.0%, and despite the recent increase in market interest rates, this continues to provide a margin for SUPR to grow without diluting dividend cover. We forecast net assets to rise above £1.5bn by FY24 where the marginal management fee drops to 0.45% from the current 0.65%.

We would not expect SUPR to benchmark every transaction strictly against the ‘break-even’ level as its investment strategy seeks to balance risks and returns across the portfolio, seeking a spread of counterparties, assets and lease terms. While long leases provide income visibility, shorter leases may provide enhanced returns, blending a higher immediate yield with asset management opportunities to regear (extend) the lease. On a limited number scale, we would expect SUPR to acquire additional assets subject to open market rent reviews where the investment case is strong.

Secure income should support capital values

Since SUPR listed in July 2017, acquisition yields for supermarket assets have steadily compressed (store prices have risen), largely driven by strong investment demand for the secure income that supermarket assets provide, with those that have inflation-linked or fixed-uplift rents (as opposed to those with rents reviewed on an open market basis) providing good visibility of income growth. This yield compression has been reflected in the valuation of SUPR’s portfolio assets and in its NAV. Given the high degree of correlation between inflation and food prices and the level of investor appetite in the sector, SUPR expects continuing growth in both supermarket rents and for this to be reflected in capital values. This is particularly the case for omnichannel stores, the focus of SUPR’s investment, where their positive outlook is yet to be fully differentiated in market-wide valuations.

Importantly, despite yield compression, SUPR sees further potential for accretive acquisition-led growth using what it believes to be its information and relationship advantage. This may give it an insight into store trading and help it to identify those stores that are strategically important to the operators, supporting its ability to source attractive stores from the very large volume of market transactions. Although not expected, should global economic and pollical challenges become reflected in higher yields, while this would affect asset valuations,9 it would increase the income return on acquisitions.

Valuations would continue to benefit from rent growth.

Over the past three years,10 there have been c £5bn of transactions in the UK supermarket sector. In addition to SUPR, significant investors such as Realty Income, a large US REIT, have been active in the market, while Tesco has also been active in repurchasing assets as an alternative to leasing. Exhibit 2, produced by SUPR, tracks whole of market transaction yields in respect of its target market (more than 10 years remaining lease length with fixed or index-linked rent uplifts). Acquisition yields for these assets have compressed from c 5–6% at the time of SUPR’s IPO to c 4.4%.11 This is below the 4.7% net initial yield of SUPR’s portfolio, which the company believes reflects a conservative approach by valuers.

Data sourced from SUPR as at 31 December 2022.

SUPR data as at end-H122.

Exhibit 2: Atrato supermarket property yield series

Source: Supermarket Income REIT as calculated by Atrato Capital

Financials and forecast update

The April 2022 equity raise and the sharp rise in interest rates are the main drivers of our forecast changes. The number of shares in issue has increased by 26% and, on a geared basis, the c £300m of additional equity capital supports a c £500m increase in assumed acquisitions, before reinvestment of the JV proceeds. The increase in market interest rates has increased our forecast for annualised total finance expense (including amortisation of loan arrangement fees) to a peak of c 4.0% by end FY23, subsequently declining to c 3.6% by end-FY25 compared with our last published c 2.9%. Our forecasts for running interest costs (before amortisation of loan arrangement fees) are based on market expectations reflected in the three-month compounded SONIA forward curve. The implied increase in the UK base rate by at least 1.5% from the current 1.25% may prove pessimistic if uplifts are constrained by consideration of the impacts on the economy and living standards.

In addition, the continued increase in inflation has a positive effect on underlying index-linked rental income, partly offset by administrative cost increases.

Exhibit 3: Forecast revisions

Rental income (£m)

EPRA earnings (£m)

EPRA EPS (p)

EPRA NAV/share (p)

DPS (p)

New

Old

Chg.

New

Old

Chg.

New

Old

Chg.

New

Old

Chg.

New

Old

Chg.

06/22e

71.0

71.2

0%

58.3

56.5

3%

6.0

6.1

-2%

115

114

1%

5.94

5.94

0%

06/23e

100.0

82.7

21%

68.5

61.4

12%

5.5

6.2

-11%

117

119

-2%

6.00

6.10

-2%

06/24e

122.7

95.7

28%

70.5

62.2

13%

5.7

6.3

-10%

120

122

-1%

6.10

6.25

-2%

06/25e

130.2

100.6

29%

78.2

65.8

19%

6.3

6.7

-6%

126

127

0%

6.28

6.41

-2%

Source: Edison Investment Research

Key forecasting assumptions

In addition to the already announced forecasts referred to above, we assume:

A total of £500m (before costs) of acquisitions by the end of H123 at a net initial yield of 4.5%. In line with previous deployment, we assume c £200m of this will complete before end-September 2022 (including the already announced £82.3m Tesco/Asda acquisitions) and c £300m before end-December 2022.

In addition, we assume c £300m (before costs) of acquisitions during early FY24 as SUPR reinvests c £183m of cash distributions, on a geared basis, from its highly successful JV with a beneficial interest in the Sainsbury’s Reversion Portfolio, discussed in detail in our March outlook note.

Our other key assumptions include:

In line with the rent review data presented by SUPR for H222, we forecast a c £1.0m rent uplift for the period. This represents a blended average 4.4% pa uplift on reviews completed in the period or an annualised increase of c 2.7% on the end-H122 portfolio passing rent. For FY23, we assume a 3.5% uplift in rents and 3.0% thereafter, increased from previously to better reflect reported inflation. This may well prove to be a conservative assumption, as it allows for caps on index-linked rents and no material increase on the c 12% of rents that are reviewed on an open market basis.

JV recurring (non-cash) earnings until the middle of 2023 and no further valuation uplifts, although this may prove conservative, particularly in respect of ongoing negotiations with respect to the five stores where Sainsbury’s has not exercised its purchase option.

Investment adviser fees in line with the agreed schedule, at a marginal rate of 0.65% pa on net assets of more than £1,000m. We expect a further step-up in other administrative expenses to reflect the increased size of the business but then to increase broadly in line with inflation.

Finance expense follows the increase in borrowing, with a pick-up in the average cost of borrowing as discussed above.

For the wholly owned portfolio, yield compression is not assumed in our forecasts but would have a positive impact on our forecast returns. We estimate that a 0.1% yield tightening would lift our FY23 NAV per share by c 3.7p and our forecast FY23 total return to c 10.2%. A 0.1% widening of yields, perhaps driven by a significant increase in the yield on risk-free government bonds, would have a similar negative impact.

Targeting a net LTV of 30–40%

With recurring earnings distributed in dividends, the strong growth in SUPR’s portfolio since IPO has been financed by a blend of new equity and debt, while targeting a medium-term LTV of 30–40%. We expect it to operate towards the top of this range, reflecting the increased scale and diversification of the portfolio and the robust financial position of tenants. It can also anticipate with some confidence significant cash proceeds from the JV in mid-2023.

Exhibit 4: Equity raising in balance with LTV target

Source: Supermarket Income REIT data, Edison Investment Research forecasts. Note: *H222 net LTV is Edison forecast.

Following the refinancing announced on 4 July 2022, SUPR has total committed debt facilities of £862m, up from £705m (c £794m including accordion options12) previously. We estimate drawn debt of a little under £400m at end-FY22, including short-term debt repayments from the proceeds of the April equity raise, ahead of deployment, and a net LTV of around 18%. By end-FY23 we expect most of the increased debt facilities will have been drawn to fund acquisitions and that the LTV will increase towards 40% on a fully deployed basis.13 We forecast that additional debt of c £125m will be required in FY24 as the cash returns from the JV are reinvested on a geared basis.

Accordion options to increase the size of the commitment with the approval of the lender. Post refinancing there are no accordion options.

In our forecasts, FY23 net LTV remains around 30% due to the receipt of JV proceeds around the FY23 year-end, but increases as the these are deployed.

Returns and valuation

The 7–10% NAV total return targeted by SUPR is the product of rental income increasing with RPI, supporting dividend growth and, to the extent that property valuation yields do not change, NAV growth. Targeted returns also assume a benefit from gearing.

SUPR has performed strongly since IPO, consistently deploying capital resources swiftly to reduce cash drag, acquiring well-performing assets and benefiting from increased scale and diversification. Total accounting return (the change in NAV plus dividends paid) has steadily increased, reaching 12.1% in FY21 and 7.8% in the first half of FY22. The cumulative total return since IPO to end-H122 is 41.6% (dividends paid added back but not reinvested) or a compound 8.1% pa. Returns would be higher if adjusted for the c 6.0p per share of acquisition costs incurred in building the portfolio since IPO. Dividends have been increased each year and represent two-thirds of the total return since IPO. Although we expect DPS growth to slow while the rise in borrowing costs is absorbed, our revised forecasts continue to indicate returns in line with the company’s target range. By FY25 we expect returns at the top-end of the target range as scale builds further and assuming no acquisition costs in the year nor any further compression of valuation yields.

Exhibit 5: NAV* total return history and forecasts

FY18**

FY19

FY20

FY21

H122

IPO to end-H122

FY22e

FY23e

FY24e

FY25e

FY22–FY25e

Opening NAV per share (p)

97

96

97

101

108

97

108

115

117

120

108

Closing NAV per share (p)

96

97

101

108

113

113

115

117

120

126

126

DPS paid (p)

4.1

5.6

5.8

5.9

3.0

24.3

5.9

6.0

6.1

6.2

24.2

NAV total return

3.4%

6.6%

10.7%

12.1%

7.8%

41.6%

12.7%

6.7%

8.0%

10.2%

40.1%

Annual average compound return

8.1%

8.8%

Source: Supermarket Income REIT data, Edison Investment Research. Note: *NAV defined as EPRA NTA. **Adjusted for IPO issuance costs.

Based on the company’s FY22 target aggregate DPS of 5.94p, the prospective yield is 5.0%. The share price premium to end-H122 EPRA NTA per share of 113p is 5%.

In Exhibit 6 we show a comparison of SUPR with a group of other property companies that focus on income returns derived from long leases. SUPR’s share price has outperformed peers, the UK commercial property sector and the broad UK equity market over the past one and three years. Compared with the group average, SUPR has a similar yield and higher P/NAV ratio (5% premium versus the peer average 5% discount). 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. We expect it to prove resilient in the inflationary conditions, supporting income and capital values.

Exhibit 6: 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

65

1,922

1.07

4.5

-9%

-5%

-15%

15%

Impact Healthcare

117

451

1.02

5.5

-6%

-5%

2%

14%

Civitas Social Housing

74

452

0.67

7.5

-11%

-16%

-36%

-28%

LXi REIT

139

1,263

0.97

4.3

-5%

-8%

-2%

31%

Primary Health Properties

136

1,810

1.16

4.7

-7%

-10%

-15%

17%

Secure Income

461

1,494

1.09

3.4

-3%

1%

20%

23%

Target Healthcare

107

662

0.96

6.3

-10%

-7%

-9%

-7%

Triple Point Social Housing

85

344

0.77

6.2

-6%

-10%

-19%

-19%

Tritax Big Box

181

3,390

0.81

3.7

-10%

-27%

-11%

19%

Average

0.95

5.1

-7%

-10%

-9%

7%

Supermarket Income

119

1,469

1.05

5.0

-10%

-6%

0%

14%

UK property sector index

1,576

-12%

-19%

-13%

-13%

UK equity market index

3,864

-8%

-8%

-5%

-8%

Source: Company data, Refinitiv. Note: Priced at 5 July 2022. *Based on last reported EPRA NAV/NTA. **Based on last 12 months DPS declared.

Exhibit 7: Financial summary

Year ended 30 June

2018

2019

2020

2021

2022e

2023e

2024e

2025e

£m

INCOME STATEMENT

Rent receivable

8.5

16.9

25.5

46.2

68.9

98.0

120.7

128.2

Rent smoothing adjustment

0.5

0.4

0.9

2.0

2.2

2.0

2.0

2.0

Net service charge expense

0.0

0.0

0.0

(0.2)

(0.1)

0.0

0.0

0.0

Total rental income

8.9

17.2

26.4

47.9

71.0

100.0

122.7

130.2

Administrative & other expenses

(2.1)

(3.1)

(5.2)

(9.3)

(13.3)

(15.5)

(16.0)

(16.7)

Operating profit before investment property change in fair value

6.8

14.1

21.2

38.7

57.8

84.6

106.7

113.5

Change in fair value of investment properties

(4.1)

0.6

13.1

36.3

23.2

27.9

46.4

73.4

Share of profit of JV

0.0

0.0

0.5

15.5

43.1

9.2

0.0

0.0

Negative goodwill

0.0

0.0

3.0

0.0

0.0

0.0

0.0

0.0

Operating profit/(loss)

2.8

14.8

37.7

90.5

124.1

121.7

153.0

186.9

Net finance expense

(1.9)

(4.2)

(4.9)

(8.5)

(11.5)

(25.3)

(36.2)

(35.3)

Profit/(loss) before tax

0.8

10.6

32.8

82.0

112.5

96.5

116.8

151.6

Tax

(0.2)

(0.0)

0.0

0.0

0.0

0.0

0.0

0.0

Profit/(loss) for the period

0.6

10.6

32.8

82.0

112.5

96.5

116.8

151.6

Adjust for:

Changes in fair value of investment property

4.1

(0.6)

(13.1)

(36.3)

(23.2)

(27.9)

(46.4)

(73.4)

Share of changes in fair value of JV investment property

(5.6)

(31.0)

0.0

0.0

0.0

Negative goodwill

0.0

0.0

(3.0)

(3.3)

0.0

0.0

0.0

0.0

EPRA earnings

4.7

9.9

16.8

36.8

58.3

68.5

70.5

78.2

EPRA cost ratio inc. direct vacancy costs

23.5%

17.9%

19.2%

16.8%

15.6%

14.0%

13.1%

12.8%

Closing number of shares (m)

184.4

239.8

473.6

810.7

1,239.9

1,239.9

1,239.9

1,239.9

Average number of shares in issue (m)

124.2

198.1

334.2

652.8

976.7

1,239.9

1,239.9

1,239.9

IFRS EPS (p)

0.5

5.3

9.8

12.6

11.5

7.8

9.4

12.2

EPRA EPS (p)

3.8

5.0

5.0

5.6

6.0

5.5

5.7

6.3

DPS declared (p)

5.50

5.63

5.80

5.86

5.94

6.00

6.10

6.28

EPRA earnings/dividends paid

103%

92%

84%

104%

110%

92%

94%

101%

EPRA NTA total return

6.6%

10.7%

12.1%

12.7%

6.7%

8.0%

10.2%

BALANCE SHEET

Investment property

264.9

368.2

539.4

1,148.4

1,563.0

2,126.9

2,495.7

2,571.2

Associate

0.0

0.0

56.1

130.3

173.5

(0.0)

(0.0)

(0.0)

Other non-current assets

0.0

0.0

56.1

131.3

178.2

4.8

4.8

4.8

Total non-current assets

264.9

368.2

595.5

1,279.7

1,741.3

2,131.7

2,500.5

2,575.9

Trade & other receivables

1.0

3.5

1.7

3.1

3.85

5.5

6.4

6.6

Cash & equivalents

2.2

9.9

20.4

19.6

102.11

187.7

(7.3)

(7.6)

Other current assets

0.0

0.0

(0.0)

0.2

0.10

0.1

0.1

0.1

Total current assets

3.3

13.4

22.1

23.0

106.05

193.2

(0.8)

(0.9)

Deferred rental income

(1.7)

(3.5)

(5.2)

(12.1)

(15.0)

(15.0)

(15.0)

(15.0)

Current tax liabilities

(0.2)

(0.2)

0.0

0.0

0.0

0.0

0.0

0.0

Trade &other payables

(1.5)

(2.6)

(6.4)

(8.4)

(11.5)

(16.4)

(19.1)

(19.7)

Total current liabilities

(3.4)

(6.4)

(11.6)

(20.4)

(26.6)

(31.5)

(34.2)

(34.7)

Bank borrowings

(88.1)

(143.7)

(126.8)

(409.7)

(389.5)

(840.0)

(970.5)

(971.0)

Interest rate derivatives

0.0

(1.1)

(2.0)

(1.2)

0.0

0.0

0.0

0.0

Total non-current liabilities

(88.1)

(144.8)

(128.8)

(410.9)

(389.5)

(840.0)

(970.5)

(971.0)

Net assets

176.7

230.5

477.2

871.3

1,431.3

1,453.5

1,495.0

1,569.4

IFRS NAV per share (p)

96

96

101

107

115

117

121

127

EPRA NTA per share (p)

96

97

101

108

115

117

120

126

CASH FLOW

Net cash from operations

8.1

13.9

26.9

42.8

58.4

85.8

106.5

111.8

Acquisition & investment in investment property

(268.7)

(91.1)

(157.3)

(570.0)

(386.9)

(534.0)

(320.4)

0.0

Investment in associate

0.0

0.0

(52.6)

(58.7)

0.0

182.7

0.0

0.0

Other investing activity

0.0

0.0

0.0

(0.9)

(2.8)

0.0

0.0

0.0

Net cash from investing activity

(268.7)

(91.1)

(209.9)

(629.5)

(389.7)

(351.3)

(320.4)

0.0

Share issuance (net of costs)

180.9

43.9

234.8

345.6

496.2

0.0

0.0

0.0

Debt drawn/(repaid)

88.8

56.1

(16.2)

284.7

(20.4)

450.0

130.0

0.0

Interest paid and other financing costs

(2.3)

(4.3)

(5.6)

(9.3)

(10.9)

(24.8)

(35.7)

(34.8)

Dividends paid

(4.6)

(10.9)

(19.6)

(34.9)

(51.1)

(74.2)

(75.3)

(77.3)

Net cash from financing activity

262.8

84.8

193.4

586.0

413.8

351.0

19.0

(112.1)

Change in cash

2.2

7.7

10.5

(0.8)

82.5

85.6

(195.0)

(0.3)

Opening cash

0.0

2.2

9.9

20.4

19.6

102.1

187.7

(7.3)

Closing cash

2.2

9.9

20.4

19.6

102.1

187.7

(7.3)

(7.6)

Debt as per balance sheet

(88.1)

(143.7)

(126.8)

(409.7)

(389.5)

(840.0)

(970.5)

(971.0)

Net debt

(85.9)

(133.8)

(106.4)

(390.1)

(287.3)

(652.3)

(977.8)

(978.5)

LTV

32.4%

36.3%

19.7%

34.0%

18.4%

30.7%

39.2%

38.1%

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


General disclaimer and copyright

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

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

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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

General disclaimer and copyright

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

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

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.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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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