Remaining capital deployed ahead of recent transactions
Since reporting interim results, and prior to the newly announced transactions, SUPR
has completed the acquisition of two stores for £41.0m (before costs), both let to
Tesco, deploying its available capital at an average NIY of 6.8%. These were:
- A Tesco-anchored retail park in Newport, purchased for £21.0m at a 7.2% NIY. The property
was acquired as a corporate entity, saving on stamp duty, with the yield reflecting
achieved acquisition cost of 3.7% rather than the standard 6.8%. The retail park has
a WAULT of 12 years and the foodstore accounts for 81% of the value of the site with
five-yearly CPI-linked rent reviews (subject to a 3% cap and 0% floor).
- A Tesco store in Glastonbury, purchased for £20.0m at a 6.4% NIY. The foodstore benefits
from a triple-net lease with an unexpired lease term of 11 years and annual RPI-linked
rent reviews (subject to a 4% cap and 1% floor).
Immediate exchange of contracts on the first three pipeline assets
Immediately following the share placing, SUPR exchanged contracts to acquire three
well-established supermarkets with strong trading histories, let to investment-grade
tenants on triple-net leases, for an aggregate £118m. The blended NIY of 6.9% is well
above the existing portfolio yield of 6.0% at end-H126. Completion is expected in
September.
The supermarkets are:
- Sainsbury’s, Manchester on a 5.2 acre site comprising a 71k sq ft supermarket with
a click-and-collect facility. The unexpired lease term is 12 years with rent of £34
per sq ft and annual RPI-linked rent reviews (subject to a 5% cap and 3% floor).
- Tesco, Edinburgh on an 8.8 acre site comprising a 128k sq ft supermarket with eight
home-delivery vans and click-and-collect facility. The unexpired lease term is five
years with rent of £33 per sq ft and annual RPI-linked rent reviews (subject to a
4% cap and 0% floor).
- Tesco, Halifax on a 5.1 acre site comprising a 41k sq ft supermarket. The unexpired
lease term is eight years with rent of £35 per sq ft and annual RPI-linked rent reviews
(subject to a 5% cap and 0% floor).
The properties have been acquired through a corporate entity, saving on stamp duty
costs, and the NIY indicates an annualised rent roll of c £8.4m. Prior to the transaction,
SUPR’s portfolio had an annualised passing rent roll of £129m with a WAULT of 12 years and a NIY of 6.1% (based on the end-H126 portfolio valuations).
The WAULT of the three assets is a relatively short eight years and the average rents
of £34 per sq ft are above the end-H126 portfolio average of £23. SUPR says they offer
good re-gear opportunities, which play to the company’s strength as a sector-specialist investor, providing the opportunity to underwrite
the re-gear risks more effectively than many others. The value created by re-gear
opportunities comprises a period of higher ‘over-rent’ for the term of the existing
lease (in this case a highly attractive 6.9% NIY) followed by reversion to a lower,
rebased level of rent over a newly extended term, with the increased duration of cash
flow providing potential for a capital uplift.
Since reporting interim results, SUPR has agreed re-gear terms on two existing stores,
extending the WAULT of seven years to 15 years at rents broadly in line with the externally
assessed expected rental value (ERV), an estimate of the rent that could be achieved
if the stores were let at market rents today. One of the leases was renewed at the
in-place passing rent, while the other had a 15% rent reduction. No rent-free periods
or other lease incentives were granted. For these assets, SUPR expects that, taken
together, the revised lease terms and extended duration of income will enhance total
returns.
Further pipeline expected to complete within three months
The further pipeline of six grocery assets, the acquisition of which SUPR expects
to complete within three months for an aggregate £98m, includes:
- Five UK supermarkets let primarily to investment-grade tenants geographically spread
across the UK, with a WAULT of 13 years and average rents of £26 per sq ft.
- A grocery distribution asset let to an investment-grade grocery tenant with an unexpired
lease term of 15 years and rents of £14 per sq ft.
In aggregate, the expected NIY on all nine assets is 6.6%, implying a NIY for the
additional six assets of c 5.5%.
Recent refinancing added additional visibility to funding and debt cost
At the beginning of July, SUPR completed the refinancing of the £445m of existing
unsecured debt facilities due to mature over the next two years, reducing borrowing
costs and extending maturity.
The agreed average margin of 1.18% above SONIA (on a drawn basis) represented an annual
cost saving of £0.3m and increased the weighted average debt maturity from 2.9 years
to 3.8 years. Following the refinancing, the weighted average cost of debt is 4.4%
(pro-forma 4.8% at end-H126) and is 98% fixed or hedged until the first debt maturity
in June 2028.
Gearing has been deliberately increased over the past two years as management has
become more confident that supermarket real estate valuations are at or close to a
bottom and offering attractive investment yields, while simultaneously improving its
visibility about debt funding costs. At end-H126, adjusted net debt, including SUPR’s
share of its joint venture (JV) with Blue Owl, was £925m and the net LTV was 45% but
subsequently reduced to c 42% including all post period-end transactions and transfers
of assets to the JV.
Including the new transactions and equity raise, LTV will increase again, but the
company remains committed to a maximum 45% and expects LTV to reduce over time, to
40% or below, for which a continuation of the revaluation growth registered in H126
would be helpful. Meanwhile, the net debt-to-EBITDA cover ratio is expected to be
a comfortable 7–8x, underpinned by resilient income from predominantly investment-grade
tenants.
