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Successful equity issue and strong pipeline

Supermarket Income REIT 24 March 2021 Update
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Supermarket Income REIT

Successful equity issue and strong pipeline

Equity raise completed

Real estate

24 March 2021

Price

107p

Market cap

£867m

Net debt (£m) as at 31 December 2020

177.3

Adjusted net LTV as at 31 December 2020

25.3%

Shares in issue

810.4m

Free float

99%

Code

SUPR

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(2.3)

1.4

17.3

Rel (local)

(3.5)

(2.2)

(16.2)

52-week high/low

113p

95p

Business description

Supermarket Income REIT, listed on the special funds 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

FY21 period end

30 June 2021

Analyst

Martyn King

+44 (0)20 3077 5745

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

With a strong pipeline of investment opportunities that meet Supermarket Income REIT’s (SUPR’s)strict investment criteria, we anticipate a swift deployment of the proceeds of its just completed £153m (gross) equity raise, as has been the case with previous issues since IPO. The recent H121 results provided evidence of both the financial benefits of increased scale and the key role of omnichannel stores in supermarket distribution strategies.

Year end

Rental income (£m)

EPRA earnings (£m)

EPRA EPS*
(p)

EPRA NTA**/ share (p)

DPS
(p)

P/NTA
(x)

Yield
(%)

06/19

17.2

9.9

5.0

97

5.63

1.11

5.3

06/20

26.4

16.8

5.0

101

5.80

1.06

5.4

06/21e

47.6

40.5

6.2

103

5.86

1.04

5.5

06/22e

68.9

58.3

7.2

106

5.98

1.01

5.6

Note: *EPRA EPS is normalised, excluding gains on revaluation. **EPRA net tangible assets.

Growth driving scale and diversification benefits

SUPR’s latest equity fund-raising was again well received, with the size of the issue upscaled from £100m to £150m (£153m including the PrimaryBid offering), at 106p per share. The pipeline of investment opportunities is strong, including sales by funds seeking to meet redemption requests or investors seeking to recycle capital. SUPR says this provides an opportunity to deploy capital at attractive prices despite a general tightening in valuation yields; and it believes that tightening has much further to go. Our revised estimates assume deployment of the equity proceeds by end-FY21 with a further £100m of debt-funded deployment by end-Q122. The recent H121 results, already overtaken by continuing portfolio growth, demonstrated the benefits of scale and diversification. Rental income increased 71% to £20.4m, fully collected, and EPRA earnings by 116% to £15.5m; EPRA earnings cover of increased DPS rose to 112%. With the net initial yield on directly owned stores tightening from 5.0% to 4.7%, H121 EPRA NTA per share of 104p positively surprised us and lifts our NTA forecasts, based on unchanged yields.

Visible income and growth potential

The supermarket sector has been a net beneficiary of the pandemic, with all the main operators experiencing strong grocery sales growth, driven by online channels and mainly fulfilled by omnichannel stores (combining in-store and online fulfilment), of the type targeted by SUPR. Upwards-only, predominantly inflation-linked rent uplifts and long leases provide visible income potential, while the strong and improving financial position of the store operators adds income security and is supporting yield tightening, delivering capital growth. Supermarket property has a long record of positive total returns underpinned by stable income returns, and the strength of tenant covenant is reflected in rental income due being collected in advance with no defaults, deferrals or rent reductions.

Valuation: Secure, growing income

SUPR’s FY21 aggregate DPS target of 5.86p represents an attractive prospective dividend yield of 5.5% with visible potential for growth. Compared with a group of other long income-focused REITs, its yield is above average with a similar P/NAV.

Successful equity raise and strong investment pipeline

Strong investment pipeline

At the time of launching the share issue in early March, the investment adviser had identified a number of attractive acquisition opportunities across the marketplace, including:

four assets with an aggregate value of approximately £230m (the ‘Target Assets’) on which the investment advisor has undertaken its own preliminary due diligence and negotiations. It was disclosed that these assets all support physical and online sales channels and benefit from long leases, with a weighted average unexpired lease term of 12 years and expected net initial yields broadly in line with the existing portfolio.

a further pipeline of nine assets with an aggregate value of approximately £184m that meet SUPR’s strict acquisition criteria (the ‘Pipeline’).

Taken as a whole, the Target Assets and the Pipeline provide visibility on current market pricing and multiple investment opportunities for capital deployment. Moreover, the investment adviser continues to exploit its market knowledge to explore additional potential investments. In current market conditions this is likely to include sales by investment funds to meet redemption requests or investors seeking to recycle capital, and this is providing SUPR with the opportunity to deploy capital at yields that are in many cases above prevailing market averages, continuing to meet its investment objectives. The company’s decision to increase the size of the equity raise recognised the investment advisor’s confidence in executing on the pipeline as well as the strong level of support from investors. Indeed, the investment advisor has commented that during the roadshow period it saw an increase in attractive investment opportunities and therefore expects to be able to deploy the equity proceeds efficiently. The £200m (gross) proceeds of the October 2020 equity raise were deployed by January 2021, continuing a strong track record of deployment since IPO.

Forecast update

When we last published, in February 2021, we note that SUPR had substantially committed its available equity and debt funding headroom based on its medium-term loan to value ratio (LTV) target of 30–40%; although there remained significant flexibility within the expanded debt portfolio to fund further investment should SUPR choose to. SUPR subsequently completed the acquisition of a Tesco supermarket in Prestatyn, North Wales, for £26.5m (before acquisition costs) taking aggregate acquisition spending thus far in H221 to £146.1m (before acquisition costs) at a blended net initial yield of just more than 5% (H121 store portfolio blended average net initial yield 4.7% or 4.8% including ancillary assets).

Our revised forecasts include the equity raise and deployment of the proceeds including associated gearing. We have also adjusted for the interim results, primarily in respect of the portfolio yield compression, driving stronger valuation gains and NAV growth than we had allowed for.

On top of the disclosed acquisitions above we assume:

£150m (before costs) is invested by end FY21 (ie end-June 2021), swiftly deploying the proceeds of the equity raise;

an additional £100m is invested by the end of Q122 (ie end-September 2021) as the additional equity is geared up to 40%; and

an average net initial yield on acquisitions of 4.9%.

A summary of our revised estimates is shown in Exhibit 1 and can be seen in detail in the Financial summary (Exhibit 3). We have made no change to our DPS growth forecasts with post-deployment EPRA dividend cover remaining strong at c 120% in FY22e and FY23e. Adjusted dividend cover, which conservatively strips out the non-cash JV earnings contribution, increases as a result of the larger share of directly owned assets. On this basis we now expect effectively full cover by FY23 (99% versus 94% previously). Increased EPRA NTA per share reflects the portfolio valuation gains reported in H121. Our forecasts are based on unchanged yields although we note that the investment advisor anticipates that the yield shift apparent in H121 is likely to continue.

Exhibit 1: Key forecast changes

Rental income (£m)

EPRA earnings (£m)

EPRA EPS (p)

EPRA NTA/share (p)

DPS (p)

New

Old

Chg.

New

Old

Chg.

New

Old

Chg.

New

Old

Chg.

New

Old

Chg.

06/21e

47.6

46.7

2%

40.5

39.6

2%

6.2

6.4

-4%

103

98

5%

5.86

5.86

0%

06/22e

68.9

54.9

25%

58.3

48.3

21%

7.2

7.2

-1%

106

102

4%

5.98

5.98

0%

06/23e

71.7

56.0

28%

59.9

49.1

22%

7.4

7.4

0%

110

106

4%

6.10

6.10

0%

Source: Edison Investment Research

Brief overview of interim results

Although the H121 results were dominated by the continuing strong growth in the portfolio (discussed at length in our February Outlook note), the underlying performance of the portfolio remained strong, including upwards-only, predominantly inflation-indexed rent uplifts, full rent collection and a strong increase in property valuation, sufficient to more than offset property acquisition costs. Valuation growth was driven by yield tightening, reflecting strong investor interest in supermarket properties and the strengthening tenant covenant. The supermarket sector has been a net beneficiary of the pandemic, and has seen a strong increase in grocery sales volumes, particularly online and through omnichannel stores, on which SUPR focuses, in particular.

Exhibit 2: Summary of H121 financial performance

£m unless stated otherwise

H121

H120

H120/H1/19

FY20

Total rental income

20.4

11.9

71%

26.4

Administrative & other expenses

(4.1)

(2.3)

80%

(5.2)

Operating profit before investment property change in fair value

16.3

9.6

69%

21.2

Net finance expense

(3.7)

(2.5)

(4.9)

Adjusted EPRA earnings

12.6

7.2

75%

16.3

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

2.9

0.0

0.5

EPRA earnings

15.5

7.2

116%

16.8

Negative goodwill

0.0

0.0

3.0

Change in fair value of investment properties

15.5

0.6

13.1

Change in fair value of investment properties within JV

2.0

0.0

0.0

IFRS earnings

33.0

7.8

325%

32.8

Period end number of shares

665.9

337.9

97%

473.6

Average number of shares

561.4

285.4

97%

334.2

Basic & diluted IFRS EPS (p)

5.9

2.7

9.8

EPRA & diluted EPS (p)

2.8

2.5

10%

5.0

DPS (p)

2.93

2.88

2%

5.80

Dividend cover

112%

90%

85%

Adjusted dividend cover

91%

90%

83%

Gross assets

1,011.6

504.2

617.5

Investment properties

885.3

490.4

539.4

Net assets

691.8

328.0

477.2

EPRA NTA per share (p)

104

97

101

Net balance sheet debt

(239.2)

(158.7)

(106.4)

Adj. LTV (includes JV equity)

25.3%

32.4%

17.9%

Source: Supermarket Income REIT data

Given the continuing rapid growth of the portfolio, both in the period since end-H121 but also prospectively as the equity raise proceeds are deployed, we do not intend to dwell on the H121 results in detail. We note however:

£315m of capital deployment, taking gross assets above £1bn.

Growth in annualised passing roll to £46.0m from £28.8m at end-FY20.

Despite the annualised impact of this growth in rent roll not being fully captured in H121, total rental income earned during the period increased 71% y-o-y and was at 77% of the full year FY20 level.

Operational gearing was demonstrated by the more than doubling of EPRA earnings to £15.5m, more than 90% of the full-year FY20 level. Excluding the non-distributed profits from the Sainsbury’s Reversion Portfolio joint venture, adjusted EPRA earnings increased 75%.

Dividends continued to increase with RPI-inflation, as they have done each year since IPO, and dividend cover increased on both an EPRA earnings basis (112% cover) and an adjusted EPRA earnings basis (91%).

A like-for-like portfolio valuation increase of 5.5% added 5.1p to NTA per share, more than double to the 2.4p cost of acquisitions, and overall NTA per share increased to 104p (FY20: 101p). Including DPS paid the six-month EPRA NTA total return was 5.9%.

Exhibit 3: Financial summary

Year ended 30 June

2018

2019

2020

2021e

2022e

2023e

£m

INCOME STATEMENT

Rent receivable

8.5

16.9

25.5

45.8

66.3

69.0

Rent smoothing adjustment

0.5

0.4

0.9

1.8

2.6

2.7

Total rental income

8.9

17.2

26.4

47.6

68.9

71.7

Administrative & other expenses

(2.1)

(3.1)

(5.2)

(8.7)

(9.7)

(10.1)

Operating profit before investment property change in fair value

6.8

14.1

21.2

38.9

59.2

61.5

Change in fair value of investment properties

(4.1)

0.6

13.1

1.1

16.2

23.6

Share of profit of jv

0.0

0.0

0.5

9.7

11.0

11.0

Negative goodwill

0.0

0.0

3.0

0.0

0.0

0.0

Operating profit/(loss)

2.8

14.8

37.7

49.6

86.5

96.2

Net finance expense

(1.9)

(4.2)

(4.9)

(8.0)

(11.9)

(12.6)

Profit/(loss) before tax

0.8

10.6

32.8

41.6

74.6

83.5

Tax

(0.2)

(0.0)

0.0

0.0

0.0

0.0

Profit/(loss) for the period

0.6

10.6

32.8

41.6

74.6

83.5

Adjust for:

Changes in fair value of investment property

4.1

(0.6)

(13.1)

(1.1)

(16.2)

(23.6)

Negative goodwill

0.0

0.0

(3.0)

0.0

0.0

0.0

EPRA earnings

4.7

9.9

16.8

40.5

58.3

59.9

Share of profit of jv

0.0

0.0

(0.5)

(9.7)

(11.0)

(11.0)

Adjusted earnings

4.7

9.9

16.3

30.9

47.3

48.9

Closing number of shares (m)

184.4

239.8

473.6

810.4

810.4

810.4

Average number of shares in issue (m)

124.2

198.1

334.2

653.0

810.4

810.4

IFRS EPS (p)

0.5

5.3

9.8

6.4

9.2

10.3

EPRA EPS (p)

3.8

5.0

5.0

6.2

7.2

7.4

Adj EPS (p)

3.8

5.0

4.9

4.7

5.8

6.0

DPS declared (p)

5.50

5.63

5.80

5.86

5.98

6.10

EPRA earnings/dividends paid

103%

92%

85%

115%

121%

122%

Adj. earnings/dividends paid

103%

92%

83%

87.3%

98.2%

99.4%

BALANCE SHEET

Investment property

264.9

368.2

539.4

1,185.9

1,310.7

1,337.0

Associate

0.0

0.0

56.1

123.4

134.4

145.4

Other non-current assets

0.0

0.0

56.1

123.4

134.4

145.4

Total non-current assets

264.9

368.2

595.5

1,309.3

1,445.1

1,482.4

Trade & other receivables

1.0

3.5

1.7

2.7

3.5

3.6

Cash & equivalents

2.2

9.9

20.4

(23.4)

19.3

17.0

Other current assets

0.0

0.0

(0.0)

0.5

0.5

0.5

Total current assets

3.3

13.4

22.1

(20.2)

23.3

21.1

Deferred rental income

(1.7)

(3.5)

(5.2)

(9.4)

(9.4)

(9.4)

Current tax liabilities

(0.2)

(0.2)

0.0

0.0

0.0

0.0

Trade &other payables

(1.5)

(2.6)

(6.4)

(8.1)

(10.6)

(10.8)

Total current liabilities

(3.4)

(6.4)

(11.6)

(17.6)

(20.0)

(20.2)

Bank borrowings

(88.1)

(143.7)

(126.8)

(440.4)

(590.9)

(591.4)

Interest rate derivatives

0.0

(1.1)

(2.0)

(2.2)

(2.3)

(2.3)

Total non-current liabilities

(88.1)

(144.8)

(128.8)

(442.6)

(593.2)

(593.7)

Net assets

176.7

230.5

477.2

828.9

855.2

889.6

IFRS NAV per share (p)

96

96

101

102

106

110

EPRA NAV per share (p)

96

97

101

103

106

110

CASH FLOW

Net cash from operations

8.1

13.9

26.9

41.4

58.3

59.0

Acquisition & investment in investment property

(268.7)

(91.1)

(157.3)

(643.6)

(106.0)

0.0

Investment in associate

0.0

0.0

(52.6)

(57.6)

0.0

0.0

Other investing activity

0.0

0.0

0.0

(0.5)

0.0

0.0

Net cash from investing activity

(268.7)

(91.1)

(209.9)

(701.7)

(106.0)

0.0

Share issuance (net of costs)

180.9

43.9

234.8

345.6

0.0

0.0

Debt drawn/(repaid)

88.8

56.1

(16.2)

314.8

150.0

0.0

Interest paid and other financing costs

(2.3)

(4.3)

(5.6)

(8.6)

(11.4)

(12.1)

Dividends paid

(4.6)

(10.9)

(19.6)

(35.3)

(48.2)

(49.2)

Net cash from financing activity

262.8

84.8

193.4

616.5

90.4

(61.3)

Change in cash

2.2

7.7

10.5

(43.7)

42.7

(2.3)

Opening cash

0.0

2.2

9.9

20.4

(23.4)

19.3

Closing cash

2.2

9.9

20.4

(23.4)

19.3

17.0

Debt as per balance sheet

(88.1)

(143.7)

(126.8)

(440.4)

(590.9)

(591.4)

Net debt

(85.9)

(133.8)

(106.4)

(463.8)

(571.6)

(574.4)

Adjusted LTV (including JV equity)

32.4%

36.3%

17.9%

35.4%

39.6%

38.7%

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


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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 £49,500 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.

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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 £49,500 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.

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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.

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Copyright: Copyright 2021 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.

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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

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