Supermarket Income REIT — Reducing NAV but focusing on income

Supermarket Income REIT (LSE: SUPR)

Last close As at 17/07/2024

GBP0.75

−0.80 (−1.06%)

Market capitalisation

GBP940m

More on this equity

Research: Investment Companies

Supermarket Income REIT — Reducing NAV but focusing on income

Ahead of interim results for the six months ended 31 December 2022 (H123), Supermarket Income REIT (SUPR) has reported its externally assessed property valuation. The like-for-like 13.3% decline is below the broad market decline of c 19% but above our assumption. We have reduced our FY23e EPRA NTA per share by c 10% to 91p but our forecasts for EPRA earnings, dividends and dividend cover are unchanged.

Martyn King

Written by

Martyn King

Director, Financials

Supermarket Income REIT_resized

Investment Companies

Supermarket Income REIT

Reducing NAV but focusing on income

End-FY22 valuation report

Real estate

28 February 2023

Price

91p

Market cap

£1,183m

Net debt (£m) at 30 June 2022

297.3

Net LTV at 30 June 2022

32.1%

Shares in issue

1,239.9m

Free float

99.5%

Code

SUPR

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(7.7)

(16.1)

(24.5)

Rel (local)

(8.8)

(20.0)

(29.5)

52-week high/low

133p

91p

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 results

30 March 2023

Analyst

Martyn King

+44 (0)20 3077 5700

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

Ahead of interim results for the six months ended 31 December 2022 (H123), Supermarket Income REIT (SUPR) has reported its externally assessed property valuation. The like-for-like 13.3% decline is below the broad market decline of c 19% but above our assumption. We have reduced our FY23e EPRA NTA per share by c 10% to 91p but our forecasts for EPRA earnings, dividends and dividend cover are unchanged.

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

0.83

6.3

06/23e

97.3

71.7

5.8

91

6.00

1.05

6.3

06/24e

103.1

70.9

5.7

93

6.00

1.02

6.3

06/25e

107.1

74.2

6.0

97

6.00

0.98

6.3

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

Valuation update

SUPR’s direct portfolio has been valued at £1,625m as of 31 December 2022 (end-H123) compared with £1,562m at 30 June 2022 (end-FY22) and includes £300m of acquisitions (before acquisition costs). The negative like-for-like valuation movement on the portfolio at the start of the period is 13.3%, with additional adjustments for acquisition costs and the value of assets acquired in the period. Across the broad UK property sector, yields have been adjusting to the increased cost of capital. End-year valuations incorporate volatility in financial markets, uncertainty about the longevity of high inflation and economic growth, and low transactions volumes. There has been a tendency for sectors with lower valuation yields to reprice more significantly despite, in many cases, a continuation of the positive fundamentals that had previously underpinned values. The SUPR portfolio net initial yield has increased to 5.5% from 4.6% during the six-month period.

Structurally supported income and capital values

SUPR’s investment proposition is based primarily on robust and visible income growth from long (c 14 years weighted average lease length) upward-only, mostly inflation-linked leases with strong tenants. The grocery sector benefits from sales inflation, while caps on indexed rents (typically c 4%) enhance affordability. The high-quality omnichannel stores on which SUPR is focused are expected to take further market share over time and it is far from clear that this is yet reflected in sector valuations. While market-wide property valuation uncertainty remains, we would expect SUPR’s rental growth to significantly mitigate any further general widening of yields over coming months. We will revise our forecasts more fully with the FY23 results in late March.

Valuation: Well supported income visibility

SUPR’s FY23 DPS target of 6.0p represents an attractive yield of 6.3%. Meanwhile the shares have tracked EPRA NTA downwards and continue to trade at close to FY23e EPRA NTA, below the average 5% premium since IPO.

Exhibit 1: Financial summary

Year ended 30 June (£m)

2021

2022

2023e

2024e

2025e

INCOME STATEMENT

Rent receivable

46.2

69.7

94.5

100.3

104.3

Rent smoothing adjustment

2.0

2.7

2.8

2.8

2.8

Net service charge expense

(0.2)

(0.3)

0.0

0.0

0.0

Total rental income

47.9

72.1

97.3

103.1

107.1

Administrative & other expenses

(9.3)

(13.9)

(16.4)

(16.8)

(17.3)

Operating profit before investment property change in fair value

38.7

58.2

80.9

86.4

89.9

Change in fair value of investment properties

36.3

21.8

(231.6)

29.8

55.7

Share of profit of jv

15.5

43.3

13.0

0.0

0.0

Negative goodwill

0.0

0.0

0.0

0.0

0.0

Operating profit/(loss)

90.5

123.3

(137.7)

116.2

145.5

Net finance expense

(8.5)

(13.0)

(18.1)

(15.5)

(15.7)

Profit/(loss) before tax

82.0

110.3

(155.8)

100.7

129.9

Tax

0.0

0.0

0.0

0.0

0.0

Profit/(loss) for the period

82.0

110.3

(155.8)

100.7

129.9

Adjust for:

Changes in fair value of investment property

(36.3)

(21.8)

231.6

(29.8)

(55.7)

Share of changes in fair value of JV investment property

(5.6)

(31.1)

(4.0)

0.0

0.0

Negative goodwill

(3.3)

0.0

0.0

0.0

0.0

EPRA earnings

36.8

57.4

71.7

70.9

74.2

EPRA cost ratio inc. direct vacancy costs

16.8%

16.5%

17.5%

16.2%

16.1%

Closing number of shares (m)

810.7

1,239.9

1,242.6

1,242.6

1,242.6

Average number of shares in issue (m)

652.8

975.2

1,242.1

1,242.6

1,242.6

IFRS EPS (p)

12.6

11.3

(12.5)

8.1

10.5

EPRA EPS (p)

5.6

5.9

5.8

5.7

6.0

DPS declared (p)

5.86

5.94

6.00

6.00

6.00

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

104%

108%

101%

95%

100%

EPRA NTA total return

12.1%

12.5%

-16.0%

8.9%

11.3%

BALANCE SHEET

Investment property

1,148.4

1,561.6

1,623.8

1,656.4

1,714.9

Associate

130.3

177.1

50.1

0.0

0.0

Other non-current assets

131.3

193.1

109.3

59.2

59.2

Total non-current assets

1,279.7

1,754.7

1,733.1

1,715.6

1,774.1

Trade & other receivables

3.1

1.86

5.0

5.2

5.4

Cash & equivalents

19.6

51.20

17.5

22.0

19.8

Other current assets

0.2

0.28

0.3

0.3

0.3

Total current assets

23.0

53.35

22.8

27.5

25.5

Deferred rental income

(12.1)

(16.4)

(16.4)

(16.4)

(16.4)

Current tax liabilities

0.0

0.0

0.0

0.0

0.0

Trade &other payables

(8.4)

(10.7)

(15.1)

(15.6)

(16.2)

Total current liabilities

(20.4)

(27.0)

(31.4)

(32.0)

(32.6)

Bank borrowings

(409.7)

(348.5)

(549.0)

(509.5)

(510.0)

Interest rate derivatives

(1.2)

0.0

0.0

0.0

0.0

Total non-current liabilities

(410.9)

(348.5)

(549.0)

(509.5)

(510.0)

Net assets

871.3

1,432.5

1,175.4

1,201.6

1,256.9

IFRS NAV per share (p)

107

116

95

97

101

EPRA NTA per share (p)

108

115

91

93

97

CASH FLOW

Net cash from operations

42.8

63.0

79.3

84.0

87.5

Acquisition & investment in investment property

(570.0)

(388.7)

(321.1)

0.0

0.0

Investment in associate

(58.7)

(3.5)

140.0

50.1

0.0

Other investing activity

(0.9)

(10.6)

0.0

0.0

0.0

Net cash from investing activity

(629.5)

(402.8)

(181.1)

50.1

0.0

Share issuance (net of costs)

345.6

496.4

0.0

0.0

0.0

Debt drawn/(repaid)

284.7

(61.1)

200.0

(40.0)

0.0

Interest paid and other financing costs

(9.3)

(12.7)

(60.8)

(15.0)

(15.2)

Dividends paid

(34.9)

(51.1)

(71.1)

(74.6)

(74.6)

Net cash from financing activity

586.0

371.5

68.1

(129.5)

(89.7)

Change in cash

(0.8)

31.6

(33.7)

4.6

(2.3)

Opening cash

20.4

19.6

51.2

17.5

22.0

Closing cash

19.6

51.2

17.5

22.0

19.8

Debt as per balance sheet

(409.7)

(348.5)

(549.0)

(509.5)

(510.0)

Net debt

(390.1)

(297.3)

(531.6)

(487.5)

(490.3)

LTV

34.0%

19.0%

32.9%

29.6%

28.8%

Source: Supermarket Income REIT, 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 2023 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

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 2023 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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