Supermarket Income REIT — Progressive dividend policy remains in place

Supermarket Income REIT (LSE: SUPR)

Last close As at 20/05/2024

GBP0.75

0.10 (0.13%)

Market capitalisation

GBP941m

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Research: Real Estate

Supermarket Income REIT — Progressive dividend policy remains in place

With its focus on high-quality omnichannel supermarkets, Supermarket Income REIT (SUPR) is very well positioned to benefit from strong growth trends in the grocery sector, supportive of its income proposition and capital values. The company is confident that the targeted FY24 DPS of 6.06p (+1%) will be fully covered as adjusted earnings benefit from rental growth, cost efficiency and fixed debt costs.

Martyn King

Written by

Martyn King

Director, Financials

Real Estate

Supermarket Income REIT

Progressive dividend policy remains

Post-FY23 results outlook

Real estate

6 November 2023

Price

81p

Market cap

£1,010m

Net debt at 30 June 2023*
*Excludes unamortised loan arrangement fees.

£630.0m

Net LTV at 30 June 2023*
*34% pro-forma including post-period end events.

37.4%

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

9.9

5.9

(20.9)

Rel (local)

10.3

8.0

(22.9)

52-week high/low

109p

70p

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 appreciation over the longer term.

Next events

AGM

7 December 2023

Analyst

Martyn King

+44 (0)20 3077 5700

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

With its focus on high-quality omnichannel supermarkets, Supermarket Income REIT (SUPR) is very well positioned to benefit from strong growth trends in the grocery sector, supportive of its income proposition and capital values. The company is confident that the targeted FY24 DPS of 6.06p (+1%) will be fully covered as adjusted earnings benefit from rental growth, cost efficiency and fixed debt costs.

Year end

Rental
income (£m)

Adjusted EPRA
earnings (£m)

Adjusted EPRA
EPS* (p)

NAV**/
share (p)

DPS
(p)

P/NAV
(x)

Yield
(%)

06/23

95.2

72.4

5.8

93

6.00

0.87

7.4

06/24e

106.5

75.9

6.1

93

6.06

0.87

7.5

06/25e

110.2

77.1

6.2

96

6.12

0.84

7.6

06/26e

114.6

76.8

6.2

98

6.18

0.82

7.6

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

Organic growth with flexibility

We expect organic rental growth, a full contribution from more recent acquisitions, enhanced asset management and possible capital recycling to drive earnings and fully covered DPS growth. Unwinding of the highly successful Sainsbury’s Reversion Portfolio (SRP) investment, combined with significant refinancing activity, has reduced borrowings and extended maturity to more than four years, fixed at an average 3.1%. With a strong and flexible balance sheet, SUPR is well prepared for challenges and opportunities that may arise. FY23 adjusted earnings grew strongly (26%), with rental income boosted by acquisitions and rental growth, partly offset by higher borrowing costs. With an increase in the average share count, EPS was slightly lower and DPS was 97% covered. Valuations stabilised in H2, with NAV up 1p to 93p, but down from 115p at end-FY22. There are no material changes to our earnings forecasts although we do now expect continuing modest dividend growth.

Well positioned in a structurally supported sector

Given the non-discretionary nature of most grocery sales, inflation is driving strong growth in supermarket revenues and although operator margins have been squeezed, cash flow remains strong. SUPR’s focus on high-quality omnichannel stores (combining in-store and online fulfilment) positions it well in both the largest and fastest growing segments of the market. SUPR expects market rents, which typically represent c 4% of store turnover, to also increase, making its stores (average 3.8%) yet more affordable. For stores with indexed lease reviews (78% of rents), this underpins long-term income and capital values while open market reviews (12% of store rents) should benefit more directly. Meanwhile, a c 1% property yield premium to the broad market and strong fundamentals continue to attract strong investment interest, including store buybacks from operators.

Valuation: Well-supported income visibility

SUPR targets sustainable and visible income growth from long, predominantly upward-only, inflation-linked leases with strong tenants. The prospective yield is 7.5% and the shares trade at a 13% discount to NAV.

Well positioned for growth

SUPR’s portfolio is well aligned with growth trends in a structurally supported sector

Given the non-discretionary nature of most grocery sales, accounting for c 14% of household spending,1 inflation drives revenue growth. Although SUPR does not benefit directly from this growth (its rents are not tied to store turnover), it underpins the visibility and sustainability of its income growth, capital values and sustainable long-term returns.

  1 Office for National Statistics (ONS) 2023.

Grocery market revenues have increased by almost one-third since SUPR listed in 2017 and further strong growth is forecast. IGD Retail Analysis forecasts the UK grocery market will grow by c 11% in 2023 and by a similar rate over the period between 2022 and 2027, with supermarkets2 remaining the dominant channel and online sales set to remain one of the fastest growing sectors (having already increased from 8% in 2018 to c 12%3). It is estimated that c 80% of online sales are fulfilled through omnichannel stores, mostly through the larger store format. SUPR’s focus on omnichannel stores thus provides exposure to the largest single grocery sales channel and the fastest growing segment.

  2 As opposed to convenience stores and discounters.

  3 It is estimated online reached an above trend peak of c 15% during the COVID-19 pandemic.

Store revenues drive market rental growth with rents typically averaging c 4% of turnover (the average for SUPR is 3.8%) and SUPR expects market rent growth to accelerate. It also expects little in the way of new large-store-format openings with a dearth of available suitable sites. While most (78%) of SUPR’s rents are indexed to inflation, with upward-only reviews capped at an average of 4%, around 12% of its supermarket rents are reviewed on an open market basis, typically five-yearly,4 providing a medium-term opportunity to capture market rental growth. While index-linked rents do not immediately benefit, the risk that they become ‘over-rented’5 is mitigated by faster open market rental growth, providing support for residual values6 and the portfolio’s capital growth prospects.

  4 Including co-located ancillary properties, c 20% of SUPR’s rents are reviewed on an open market basis.

  5 Where contracted rents are above the level that would be achieved if let at market levels.

  6 The projected value ascribed to the property at lease maturity.

SUPR’s focus on high-quality, ‘mission critical’ omnichannel stores, predominantly let to the leading UK grocery operators, is thus very well aligned with grocery market development. 93% of its stores are omnichannel and 77% are let to Tesco (48%) and Sainsbury’s (29%), well ahead of their grocery market shares of c 27% and c 15%, respectively.

Supermarket property provides relative stability

The sustainability and visibility of supermarket income has historically offered relative stability and superior risk-adjusted returns compared with the broad UK commercial property market. We expect this will continue. Supermarket lease agreements are often long-dated (typically 20–30 years at inception without break options), fully repairing and insuring, and subject to upwards-only rent review, often linked to inflation. The large operators represent strong covenants. In times of inflation, operators have the ability to significantly pass through cost pressures on non-discretionary grocery sales and while the recent high level of price increases (grocery inflation peaked at c 19% but has since moderated) has seen operator margins tighten, cash flows have remained strong.

Supermarket property values have not been immune to the market-wide impact of higher capital costs although the 13.7% like-for-like decline in SUPR’s property valuation in FY23 compared favourably with the c 19% decline in capital values across the wider market and stabilised in H223.

With fundamental support for the sector, and property yields that are c 100bp (1%) higher than the broad market average, transaction volumes have remained robust, a mix of operator buybacks and investment flows.

Strong balance sheet and funding costs fixed

SUPR’s balance sheet position is both strong and flexible, debt has been reduced and interest costs fixed. A key development during FY23 was the sale of SUPR’s 51% beneficial interest in the SRP for £430.9m (before costs). Following full receipt of the proceeds, and a significant post year-end refinancing programme, borrowing has been reduced by c £100m since end-H123 and the pro-forma loan to value ratio (LTV) to 34%. Debt costs are fixed at 3.1% for the more than four-year average duration of borrowings, 61% of which is now unsecured.

Successful and efficient unwind of the SRP structure

The details of SUPR’s highly successful investment in the SRP are contained in our January update note. The SRP was created by Sainsbury’s in sale and leaseback transactions in 2000, comprising 26 stores, which it continued to operate under occupational leases, which expired in March 2023 and July 2023.

Following investments in 2020 (£102m before costs) and 2021 (£115m before costs), through a 50:50 joint venture with British Airways Pension Fund (BAPTL), SUPR took a 25.5% (its share) indirect beneficial interest in the SRP. In January 2023, it acquired BAPTL’s 25.5% beneficial interest. This additional stake was acquired for £196m, a c £4m discount to net asset value. It was funded by a short-term financing facility, which was fully repaid from the sale proceeds, and the discount to NAV offset £4m of loan arrangement fees. Similarly, the additional income of £2m that SUPR earned on the increased stake offset the loan interest. Crucially, the transaction allowed SUPR to unlock an additional £16m of fair value through the efficient unwind of the structure.

Including recurring income and the profit on disposal of £19.9m reported in FY23, SUPR’s investment generated highly attractive returns for the company and, including income earned, the disposal reflected a money multiple of 1.9x and an internal rate of return of c 30%.

The £430.9m sale proceeds were received in tranches. The first tranche of £279.3m was received in March 2023 and a second tranche of £116.9m was received immediately after the FY23 year-end. The third and final tranche of £34.7m was conditional on the sale of the remaining five stores in the SRP.7 Four of these stores were acquired by SUPR (exercising its purchase option) for £61.6m in March 2023 and, post year-end, in July 2023, utilising £33.3m of the outstanding receivable.8

  7 The SRP portfolio had comprised 26 freehold stores, of which 21 were acquired directly by Sainsbury’s. Of the five remaining stores, four were re-leased to Sainsbury’s on new 15-year leases (with five-yearly open market rent reviews and a tenant break option at year 10). The fifth is to be sold with vacant possession.

  8 £61.6m represents the full value of the stores before costs with amount payable netted off against the £33.3m receivable. The remaining £1.4m receivable is in respect of the sale of the remaining store, not leased to Sainsbury’s.

On a recurring EPRA basis, the circa nine-month FY23 contribution of SRP investment, prior to sale, was £11.7m. The sale of the 21 stores to Sainsbury’s was at an average net initial yield of 4.3%, significantly tighter than the yields achieved by SUPR on acquisitions, with this positive income arbitrage highlighting the company’s ability to efficiently recycle capital.

Exhibit 1: Impact of SRP investment on earnings

£m

FY23

FY22

EPRA earnings

11.7

12.2

Revaluation gain

11.5

31.1

Gain on disposal

19.9

0.0

Total contribution to IFRS earnings

43.2

43.3

Source: Supermarket Income REIT data

Continuing, fully covered DPS growth

We forecast organic rental growth, improved cost efficiency and fixed borrowing costs to deliver continued, albeit modest, dividend growth, fully covered by adjusted earnings, discussed in detail throughout this report.

FY23 adjusted EPRA earnings (see Exhibit 2) were slightly (2%) below our forecasts due to a combination of lower rental income and higher costs, partly offset by higher expenses and associate/JV earnings.

There is no material change in our forecasts for FY24 adjusted EPRA earnings and a c 2% increase for FY25. We now expect DPS to increase marginally (c 1%) in both years and to be fully covered. For FY26 we forecast further earnings progress, driven by rental uplifts, with continuing modest, fully covered DPS growth.

Exhibit 2: Summary of forecast revisions

Estimates

Previous estimate

Difference/change in forecast

£m unless stated otherwise

FY24e

FY25e

FY26e

FY24e

FY25e

FY24

FY25

FY24

FY25

Rent receivable

103.9

107.5

111.8

103.5

106.2

0.4

1.3

0%

1%

Rent smoothing adjustment

3.0

3.0

3.0

3.0

3.0

0.0

0.0

0%

0%

Net service charge expense

(0.4)

(0.3)

(0.2)

(0.4)

(0.4)

0.0

0.1

0%

-25%

Rental income

106.5

110.2

114.6

106.1

108.8

0.4

1.4

0%

1%

Expenses

(13.9)

(14.2)

(14.5)

(13.6)

(14.1)

(0.3)

(0.1)

2%

1%

Share of associate EPRA earnings

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Net finance costs

(16.7)

(18.9)

(23.3)

(16.8)

(19.1)

0.1

0.3

0%

-1%

Adjusted EPRA earnings

75.9

77.1

76.8

75.8

75.6

0.1

1.6

0%

2%

Adjusted EPRA EPS (p)

6.1

6.2

6.2

6.1

6.1

(0.0)

0.1

0%

2%

DPS (p)

6.06

6.12

6.18

6.00

6.00

0.06

0.12

1%

2%

Dividend cover (x)

101%

101%

100%

102%

101%

Gross borrowing

579.6

578.3

577.8

511.2

511.7

68.4

66.6

13%

13%

LTV

31.6%

30.8%

30.4%

29.7%

28.9%

EPRA NTA per share (p)

93

96

98

96

100

(2.9)

(3.7)

-3%

-4%

EPRA NTA total return

6.5%

10.3%

8.7%

11.4%

10.7%

Source: Edison Investment Research

FY24 rental income will benefit fully from the H223 acquisitions and from the two transactions completed in July. Given the high cost of capital relative to investment yields we have assumed no further acquisitions, although the company is open to accretive capital recycling. On this basis, our forecasts for FY25 and FY26 rental income are driven entirely by rental uplifts at review.

Our finance cost forecast is adjusted for the refinancing completed in early H124 and slightly higher average borrowings related to the acquisitions lift our expected finance costs.

We expect additional costs related to the SRP unwind to fall away in FY24, but allowing for this, our forecast costs are higher than previously assumed. We nonetheless expect cost efficiency to continue to improve, with the EPRA cost ratio falling towards 13% by end-FY26 (FY23: 15.5% excluding direct vacancy costs).

With adjusted EPRA earnings fully distributed, we forecast modest c 2% pa growth in EPRA NTA/NAV per share, assuming that the positive impact of rental growth on property values is dampened by some additional yield widening.

We discuss each of these key forecasting assumptions in the following sections.

Rental growth

Annualised contracted rents9 increased by £23.1m or 28% to £103m during FY23, substantially driven by acquisitions, which added £20.7m, and rent reviews. A total of nine stores were purchased during the year, including two of the four stores acquired from the SRP portfolio. The acquisition of the other two SRP stores, in July, added an additional £2.5m to contracted rents. The combined consideration for all of these stores was £399m, reflecting an average net initial yield of 5.5%, well ahead of the average 4.3% yield on the 21 SRP stores acquired by Sainsbury’s. On an earned basis, gross rental income of £95.8m in FY23 is yet to fully reflect this growth.

  9 On an IFRS basis, including rent smoothing adjustments, or £100.4m on a cash basis.

Exhibit 3: Acquisitions contributed significantly to growth in FY23 annualised rents

Source: Supermarket Income REIT data, Edison Investment Research

Most (78%) of contracted rents are indexed to inflation, 71% to RPI and 7% to CPI. Of the balance, fixed uplifts account for 2% and open market reviews 20% (c 12% of supermarket rents). Of the total, 56% are reviewed annually and c 43% periodically, nearly all five-yearly and one lease seven-yearly. Uplifts in indexed leases are typically capped at an average of c 4%.

Exhibit 4: Supermarkets rent review basis

Exhibit 5: Supermarkets review period

Source: Supermarket Income REIT FY23 data

Source: Supermarket Income REIT FY23 data.

Exhibit 4: Supermarkets rent review basis

Source: Supermarket Income REIT FY23 data

Exhibit 5: Supermarkets review period

Source: Supermarket Income REIT FY23 data.

The 15 annual indexed rent reviews completed in FY23, some benefiting from higher than average cap level, generated a blended uplift of 4.1%. Reflecting accumulated inflation uplifts, the two five-yearly reviews were completed at an average 17% uplift, equivalent to 3.4% pa. Like-for-like growth in total portfolio rents was 2.7%.10

  10 The changes in net rental income for those properties held for the duration of both the year reported and comparative reporting period.

Exhibit 6: FY23 reviews were driven by annual indexation

Annual review

Five-yearly review

Number of reviews

15

2

Total uplift to previous passing rent (£m)

£1.8m

£0.4m

Total uplift to previous passing rent (%)

4.1%

17.0%

Annualised uplift (%)

4.1%

3.4%

Source: Supermarket Income REIT

UK inflation began to pick up from early 2021, with the 12-month rate peaking in October 2022. From end-2020 to October 2022, RPI increased from 1.2% pa to 14.2% pa and CPI from 1.8% pa to 11.1% pa. Although mostly capped at around 4% for each year, five-year reviews being settled currently are yet to capture the full impact and will increasingly do so even if the current annual rate of inflation continues to moderate in line with the general expectation.

The investment adviser notes that market rental values are typically driven by store turnover, with an average c 4% rent/turnover ratio across the sector. With turnover significantly inflated by inflation it expects market rents, and open market rent reviews, to accelerate.

Exhibit 7: Recent inflation and Edison future assumptions

Source: ONS data to August 2023 and Edison forecasting assumptions thereafter

Our forecasts assume that annual CPI inflation falls to c 3% by end 2024 and to a constant c 2% by end-FY25. We assume that RPI remains at a typical c 1% premium to CPI.

Lease reviews in respect of the ancillary assets (6% of rent roll) are all on a five-yearly basis at varying dates, primarily (96% by rent roll) on an open market basis.

Based on this mix of lease terms, we assume portfolio like-for-like rental income growth of 3.5% pa through FY24–26.

Borrowing costs fixed for an extended period

Significant financing activity in FY23 saw SUPR extend and broaden its banking relationships and increase the hedging of its floating rate debt exposure to 100%.11 A further comprehensive debt refinancing in September 2023 extended the weighted average maturity to just over four years (including extension options, or around three years to first maturity). The hedging arrangements were similarly adjusted to maintain a fully fixed/hedged position to maturity at an average 3.1%.

  11 The interest rate derivatives entered into in FY23 fixed the weighted average cost of the associated debt at 2.9% (including the lending margin). The cost of acquiring these was £44.3m and they were valued at £54.3m at end-FY23. A fair value gain of £10.0m and finance income received of £9.7m are reported in the IFRS income statement.

Exhibit 8: Debt maturity profile before extension options

Exhibit 9: Debt maturity profile including extension options

Source: Supermarket Income REIT data

Source: Supermarket Income REIT data

Exhibit 8: Debt maturity profile before extension options

Source: Supermarket Income REIT data

Exhibit 9: Debt maturity profile including extension options

Source: Supermarket Income REIT data

The refinancing introduced a new lender, Sumitomo Mitsui Banking Corporation (SMBC), with a £67m three-year term loan, attractively priced at a margin of 1.4% over SONIA. Partly drawn facilities with HSBC were reduced from £150m to £50m with outstanding balances repaid, and an undrawn £77.5m facility with Barclays/RBC was cancelled. Total committed facilities now amount to £689m, of which, including post balance sheet events, £585m has been drawn,12 down from £672m at end-FY23.

  12 As at the date of publication of the FY23 annual results, including post balance refinancing, acquisitions and receipt of the third tranche of the SRP sale proceeds.

The percentage of unsecured borrowing is now 61% of the total (FY22: 48%), providing significant financing flexibility. The pro-forma group level LTV of 34% compares with an average 60% covenant limit on the secured borrowing and property valuations would need to fall by more than 40% to test this. Group level interest cover of 4.1x13 compares with 1.8x minimum required. In February 2023, Fitch Ratings reaffirmed SUPR’s BBB+ investment grade credit rating.

  13 At last testing date on 30 June 2023.

Exhibit 10: Debt facilities and pro-forma borrowings post refinancing

Lender

Facility

First expiry

Extended maturity

Commitment (£m)

Drawn (£m)

BLB

Term

Mar-26

Mar-26

£86.9

£86.9

Deka

Term

Aug-24

Aug-26

£47.6

£47.6

Deka

Term

Aug-24

Aug-26

£28.9

£28.9

Deka

Term

Aug-24

Aug-26

£20.0

£20.0

HSBC

RCF

Aug-24

Sep-28

£50.0

nil

SMBC

Term

Sep-26

Jul-29

£67.0

£67.0

Unsecured syndicate

RCF

Jul-27

Jul-27

£250.0

£204.3

Unsecured syndicate

Term

Jul-25

Jul-27

£50.0

£50.0

Unsecured syndicate

Term

Jul-26

Jul-27

£50.0

£50.0

Wells Fargo

RCF

Jul-25

Jul-27

£30.0

£30.0

Wells Fargo

RCF

Jul-25

Jul-27

£9.0

nil

Total

£689.4

£584.8

Source: Supermarket Income REIT. Note: *including extension options

Stepped borrowing costs to accompany rent growth

At the same time as the refinancing, SUPR used the value of its existing in-the-money interest rate hedges to extend the term of its hedging arrangements, matching the maturity (before extensions) of its extended debt facilities, at no additional premium. The existing hedges were adjusted along with a new forward starting cap starting in August 2024 and terminating in July 2025 with a strike rate of 1.4%, representing the maximum SONIA rate payable. The weighted average interest cost of borrowing (including margin) over the period to maturity was increased marginally, to 3.1% from 2.9%.

The newly adjusted hedging arrangements are on a stepped basis, with the blended average cap rate increasing through the period to maturity. Advantageously, this better matches the income profile, which will similarly increase with rental growth. Based on the 1.4% strike price of the forward starting cap, we estimate that the 3.1% average cost to maturity implies a c 0.5% uplift each year from end-FY25, and a similar step-down for FY24.

A summary of our forecast interest costs, based on this assumption, are shown in Exhibit 11. In addition to the step-up in the SONIA cap rate, we also assume a refinancing of the low-cost Deka facility (fixed 1.90%) at maturity into other existing facilities. Facilities reaching maturity during FY25 and FY26 are assumed to be refinanced at 5%. This is somewhat below the level currently implied by the forward SONIA curve (c 4.25% by end-FY25), before lending margin, but recognises the financing provided by the strong balance sheet position.

Exhibit 11: Debt cost assumptions

FY24e

FY25e

FY26e

Period-end gross borrowing (£m)

585

584

584

Average gross borrowing (£m)

585

584

584

Interest cost*

15.7

17.9

22.3

Weighted average cost of borrowing

2.7%

3.1%

3.8%

Amortisation of loan arrangement fees (£m)

1.0

1.0

1.0

Total finance charges (£m)`

17

19

23

Weighted average finance charges

2.9%

3.2%

4.0%

Source: Edison Investment Research. Note: *Interest cost is net of derivative income.

Supermarket property valuations relatively well supported

Stabilisation of values in H223

Following the sharp market-wide adjustment of commercial property values to rising bond yields and increased economic uncertainty that affected SUPR in H123, stability returned in H2.

Over the year, SUPR’s portfolio valuation reflected a 13.7% like-for-like decline, with the valuation yield widening to 5.6% from 4.6% at end-FY22 (and 5.5% at H123). Compared with the c 19% decline in capital values across the wider market this was nonetheless a relatively robust performance.

Exhibit 12: Stabilising property valuation in H223

Source: Supermarket Income REIT data

With financial markets remaining volatile since June 2023, there has been a growing perception that while inflation is moderating and interest rates are approaching a peak, both may settle at levels above previous expectations. A higher than previously anticipated medium-term cost of capital continues to be reflected in broad market property valuations, which have weakened further since June, albeit moderately.

In this context, our forecasts reflect an increase in SUPR’s valuation yield of c 35 basis points (0.35%) by end-FY26. Each 10-basis point (0.1%) change in this yield assumption is equivalent to a c 2p per share change in forecast NTA per share. Despite the implied uplift in the valuation yield, we still expect property values to increase, driven by expected rental growth.

Positive support for supermarket property

Irrespective of uncertain market conditions, there are other positive factors that should continue to support supermarket values.

Attracted by the secure income that the sector provides, investment demand for supermarket property has remained robust, in contrast to the wider UK commercial property market. Total supermarket investment volume of c £1.7bn in the year to June 2023 compared with £1.6bn in the year to June 2022. Broader market volumes in H123 are down more than 50% year-on-year. The supermarket investment volumes include store repurchases by Tesco and Sainsbury’s (including its c £1bn repurchase of 21 of the 26 SRP stores) as they utilise strong cash flow. During the year to June 2023, among a broad range of other investment buyers, SUPR maintained a circa one-third share of the investment market (excluding operator repurchases).

Exhibit 13: Supermarket Investment volumes FY19–23

Source: Supermarket Income REIT

Reinforcing investor interest, supermarket yields are at an increased premium to the broad commercial property market and the logistics sector, having historically traded at a discount. The discount reversed in around 2015, corresponding with a period of intense competition among the supermarket operators, including growth in the discounters. The big four operators (Tesco, Sainsbury’s, Asda and Morrisons) and have nonetheless maintained a combined 65% share of the grocery market, largely unchanged in recent years, successfully operating a strategy of price and assortment through a multi-channel brand-focused offering. Each is a multi-billion-pound revenue company, operating in a growing market, with an established brand, and supermarket locations across the UK. Although trading margins have come under pressure recently with customers shielded from the worst of price rises, they have been consistently profitable and continue to generate strong cash flow.

Exhibit 14: Supermarket yield premium to broad market and logistics

Source: Supermarket Income REIT, MSCI, for the period March 2005 to June 2023

Continuing income-driven returns

As its name suggests, SUPR is focused on providing a secure and attractive level of income, with the potential for capital growth. Since listing in June 2017, the company has progressively increased dividends, and this has been the driver of total return. Since achieving scale, SUPR has targeted DPS to be fully covered and although it fell very slightly short in FY23, due to higher interest rates and a cautious capital deployment policy, it expects this to be the case in FY24.

Exhibit 15: SUPR targets fully covered progressive dividends

Source: Supermarket Income REIT data, Edison Investment Research forecast

Aggregate NAV/accounting total return since listing has been 30.1% or an average 4.5% pa. Dividends paid represent more than 100% of the total, or an average 5.1% pa. In the period to end FY22, prior to the impact of significant market-wide property valuation weakness as interest rates climbed, the accounting total return was 8.1% pa.

We forecast increasing returns in the FY24–26 period, continuing to be driven by dividends, enhanced by a modest capital uplift.

Exhibit 16: NAV total return performance and forecasts

Reported

Edison forecast

FY18*

FY19

FY20

FY21

FY22

FY23

FY18–FY23

FY24e

FY25e

FY26e

Opening NAV per share (p)

97

96

97

101

108

115

97

93

93

96

Closing NAV per share (p)

96

97

101

108

115

93

93

93

96

98

DPS paid (p)

4.1

5.6

5.8

5.9

5.9

6.0

33.2

6.0

6.1

6.2

Dividend return

4.3%

5.8%

6.0%

5.8%

5.5%

5.2%

34.3%

6.5%

6.6%

6.4%

Capital return

-1.1%

0.7%

4.8%

6.3%

7.0%

-19.3%

-4.2%

-0.1%

3.7%

2.3%

NAV total return

3.4%

6.6%

10.7%

12.1%

12.5%

-14.1%

30.1%

6.5%

10.3%

8.7%

Annual average return

4.5%

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

Valuation

The FY24 target DPS of 6.06p represents a yield of c 7.5%, well above the 5.4% average since listing in June 2017. Meanwhile, the shares trade at a c 13% discount to FY23 NAV.


Exhibit 17: Dividend yield history from IPO

Exhibit 18: P/NAV history from IPO

Source: Supermarket Income REIT data, Refinitiv prices, Edison Investment Research

Source: Supermarket Income REIT data, Refinitiv prices, Edison Investment Research


Exhibit 17: Dividend yield history from IPO

Source: Supermarket Income REIT data, Refinitiv prices, Edison Investment Research

Exhibit 18: P/NAV history from IPO

Source: Supermarket Income REIT data, Refinitiv prices, Edison Investment Research

In Exhibit 19, we show a comparison of SUPR with a group of other property companies that focus on income returns derived from long leases. Over the past year, feeding through to the three-year performance, SUPR’s share price has trailed the peer group average, while the peer group average is slightly below the broad UK property sector over one year but in-line over three years. Calculated on a trailing basis for consistency, the yield on SUPR shares is well ahead of the peer group average. Similarly, it trades at a higher P/NAV.

Exhibit 19: 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

Alternative Income REIT

64

52

0.77

9.5

10%

1%

-17%

-19%

Assura

45

1,346

0.85

7.0

11%

-4%

-19%

-24%

Impact Healthcare

88

365

0.77

7.6

9%

-2%

-15%

-19%

LondonMetric

180

1,959

0.90

5.3

9%

-4%

-2%

-13%

LXi REIT

95

1,636

0.85

6.7

10%

1%

-22%

-26%

Primary Health Properties

99

1,328

0.89

6.6

11%

4%

-12%

-19%

Target Healthcare

82

510

0.78

6.9

9%

12%

-6%

-8%

Triple Point Social Housing

58

228

0.52

9.4

17%

-9%

-14%

-19%

Tritax Big Box

152

2,890

0.84

4.7

12%

8%

9%

-10%

Average

0.80

6.8

11%

1%

-10%

-17%

Supermarket Income

81

1,011

0.87

7.4

10%

6%

-22%

-26%

UK property sector index

1,249

9%

0%

-5%

-17%

UK equity market index

4,028

0%

-2%

1%

-8%

Source: Company data, Refinitiv. Note: *Based on last reported EPRA NAV/NTA. **Based on last 12 months DPS declared. Priced at 3 November 2023.

It is interesting to contrast the share price performance of SUPR with that of the leading supermarket operators, Tesco and Sainsbury’s, its leading tenants. Since the beginning of 2021, ahead of the sharp rise in inflation and interest rates, the weighted average of the share prices of these two operators has increased by c 30% versus the broad market increase of c 12% and a c 20% decline in the price of SUPR shares. While rising interest rates have negatively affected the cost of, and return on, capital for SUPR, and weakened property values and NAV, the strong growth of supermarket sales has enhanced the security and visibility the company’s long-term rental growth.

Exhibit 20: SUPR’s share price has significantly trailed that of the supermarket operators*

Source: Refinitiv data, Edison Investment Research. Note: *Tesco and Sainsbury’s shown as a market-cap weighted index.

Details of FY23 financial performance

Exhibit 21 summarises the SUPR’s FY23 financial performance, commencing with adjusted EPRA earnings before providing a reconciliation to IFRS. Acquisitions, rental uplifts and an improved cost ratio drove strong earnings growth, despite the increased cost of borrowing. However, on a per share basis, adjusted earnings was slightly lower, reflecting a 27% increase in the average number of shares (resulting from capital raised in H222), additionally affected by a slower, highly selective approach to acquisitions in shifting market conditions.

Exhibit 21: FY23 financial performance summary

£m unless stated otherwise

FY23

FY22

FY23/FY22

H223

H123

Total net rental income

95.2

72.1

32%

49.4

45.9

Administrative & other expenses

(15.4)

(13.9)

11%

(7.5)

(7.9)

Operating profit before investment property change in fair value

79.8

58.2

37%

41.8

38.0

Net finance expense

(19.2)

(13.0)

47%

(10.2)

(8.9)

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

11.7

12.2

-4%

4.4

7.4

Adjusted EPRA earnings

72.4

57.4

26%

36.0

36.4

Change in fair value of investment properties

(256.1)

21.8

(8.0)

(248.1)

Change in fair value of investment properties within associate

11.5

31.1

.0

11.5

Change in value of interest rate derivatives

10.0

5.6

11.0

(1.0)

Profit on disposal of interest rate derivative

2.9

2.9

0.0

Profit on disposal of associate

19.9

19.9

0.0

One-off acceleration of unamortised loan arrangement fees

(1.5)

0.0

0.0

(1.5)

One-off SRP investment loan arrangement fees

(4.0)

(4.0)

IFRS earnings

(144.9)

115.9

57.7

(202.6)

Period end number of shares

1,246.2

1,239.9

1%

1,246.2

1,242.6

Average number of shares

1,242.6

975.2

27%

1,243.6

1,241.5

Basic & diluted IFRS EPS (p)

(11.7)

11.3

4.6

(16.3)

Adjusted EPRA EPS (p)

5.8

5.9

-1%

2.9

2.9

DPS declared (p)

6.00

5.94

1%

3.00

3.00

Adjusted EPRA basis dividend cover (x)

0.97

1.08

0.96

0.98

Adjusted EPRA cost ratio

15.5%

16.5%

115.1%

15.1%

Gross assets

1,934

1,808

1,934

1,924

Investment properties

1,686

1,562

1,686

1,625

Net assets

1,218

1,432

1,218

1,198

EPRA NTA per share (p)

93

115

93

92

EPRA NTA total return

-14.1%

12.5%

3.8%

-17.2%

Net debt

(634.7)

(301.0)

(634.7)

(655.2)

Loan to value ratio

37.7%

19.3%

37.7%

40.3%

Source: SUPR data, Edison Investment Research

We highlight the following:

Rental income in the year increased by £23.1m or 32% to £95.2m, with a weighted contribution of £15.2m from acquisitions and rental uplifts the balance.

While administrative and other expenses increased 11% to £15.4m, predominantly reflecting the growth of the business, the EPRA cost ratio including direct vacancy costs (relating to the non-food properties) was lowered to 15.5% compared with 16.5% in FY22. Linked to NAV, investment adviser costs increased c 9% or £0.9m to £10.3m and other administrative costs, including some related to the SRP unwind, increased by c 13% or £0.6m to £5.1m.

On an adjusted basis, net finance expenses increased 47% or £6.2m to £19.2m, reflecting higher weighted average borrowing and an increased cost of debt.

On an EPRA basis, before valuation movements, the JV contributed £11.7m, prior to its sale in March 2023.

Adjusted EPRA earnings increased 26% to £72.4m and, reflecting the 27% increase in the weighted average number of shares, adjusted EPRA EPS was 5.8p (FY22: 5.9p), covering DPS declared of 6.0p by 0.97x.

Included with IFRS earnings but not in adjusted EPRA earnings were:

Property valuation movements in respect of the directly owned portfolio and SUPR’s share of the valuation movements within the SRP prior to sale.

Movements in the value of interest rate derivatives, both unrealised and realised upon disposal.

The £19.9m gain on the sale of SUPR’s beneficial interest in the SRP, held as an associate.

The IFRS loss of £144.9m was driven by property revaluation movements.

Strong but selective portfolio growth

SUPR’s portfolio has grown very strongly since listing (Exhibit 22). Including the two assets acquired since end-FY23 it is valued at just over £1.7bn, with annualised passing rent of £103.0m reflected in a net initial yield of 5.6%. The portfolio comprises 55 supermarket stores, 93% of which are omnichannel, and a small number of co-located ancillary assets, typically non-grocery stores, the balance (see below).

Exhibit 22: Portfolio development

FY18

FY19

FY20

FY21

FY22

FY23

FY23 pro-forma*

Portfolio valuation (£m)

265

368

490

1,148

1,562

1,686

1,722

Cash basis contracted rent roll (£m)

13.6

19.2

26.1

57.8

79.8

100.4

103.0

Net initial yield

4.9%

5.0%

5.0%

4.7%

4.6%

5.5%

5.6%

No. stores

5

7

9

30

41

53

55

Net assets (£m)

177

230

328

871

1,426.6

1,156.5

1,156.5

Net LTV

32.4%

36.3%

32.4%

34.0%

19.0%

37.4%

34.0%

Source: Supermarket Income REIT. Note: *Includes post-FY23 year-end acquisition of two stores from SRP portfolio.

Selective investment policy

SUPR is highly selective in the supermarkets it acquires, not simply targeting omnichannel stores but seeking to ensure that its portfolio as a whole is focused on index-linked longer leases for the income visibility they provide, combined with strong sustainability credentials. SUPR’s stores will typically have the following additional attributes:

sites that are critical to the operations of the operators,

ideally located in large catchment populations with good transport links,

robust underlying trading and strong tenants, and

attractive property fundamentals with opportunities for active asset management.

Whilst the weighted average lease term (WAULT) of the portfolio is 13 years there is a wide range of maturities, with the longest individual term to expiry c 99 years and the shortest around two years. Shorter leases can enhance the overall return by blending a typically higher immediate yield with asset management opportunities to regear (extend) the lease. SUPR will also acquire assets subject to open market rent reviews where the investment case is strong. With supermarket rent levels typically benchmarked against store turnover, the high level of inflation is likely to have a more immediate impact on open market rents.

With growth, the portfolio has become increasingly diversified by store operator as well as by geography, although it continues to be focused on the main operators, Tesco and Sainsbury’s. This partly reflects their market presence (Tesco has a grocery market share of c 27% and Sainsbury’s c 15%) combined with leading positions in omnichannel delivery, but also the strength of covenant that these operators provide.

Exhibit 23: Portfolio diversification by operator

Exposure by rent roll

Exposure by valuation

Tesco

48.2%

48.9%

Sainsbury's

28.7%

30.4%

Morrisons

6.2%

5.6%

Waitrose

4.7%

5.2%

Asda

2.1%

2.0%

Aldi

0.8%

0.8%

M&S

0.8%

0.9%

Supermarkets

91.5%

93.8%

Non-food

8.5%

6.2%

Total portfolio

100.0%

100.0%

Source: Supermarket Income REIT data

The ancillary assets are focused on complementary non-grocery essentials

The ancillary assets are not specifically targeted by SUPR but have been acquired alongside a small number of the supermarket acquisitions. With a strong focus on essential non-grocery retail, they can often attract shoppers to the site and enhance overall footfall. Primarily, they provide SUPR with access to attractive supermarkets while allowing it to maintain full strategic control over sites, while also providing asset management options. The valuation reflects a net initial yield of 8%, while the leases are all subject to five-yearly reviews and mostly on an open market basis.

Exhibit 24: Non-grocery portfolio

Number of stores

% portfolio value

DIY

4

1.1%

Food & beverage

25

1.1%

Medical & pharmacy

12

0.9%

Other retail

6

0.7%

Local amenities

17

0.8%

Homeware

43

0.8%

Fashion

6

0.3%

Discount store

2

0.3%

Automotive

5

0.2%

Private rental

1

0.0%

Total

121

6.2%

Source: Supermarket Income REIT data

Full details of the portfolio are available on SUPR’s website.

Sustainability goals aligned with tenants

SUPR's ESG strategy is currently very focused on the sustainability agenda, which benefits from a close alignment of the aims of both SUPR and its tenants, who continually invest to improve the environmental credentials of the stores they operate. Tenants have set various targets to achieve net zero carbon from 2040 or earlier, resulting in good engagement with SUPR on sustainability initiatives that are beneficial for both. These include the installation of energy efficient lighting and refrigeration, solar photovoltaic panels and electric charging points. A benefit of the supermarket operator sustainability commitments coupled with long-dated, fully repairing and insuring leases is that much of the cost of investing in modernising and decarbonising stores is undertaken by tenants at their own expense. To support these efforts, SUPR is now receiving energy consumption data from c 85% of tenants and hopes to increase this further, including the greater access to data written into ‘green’ lease provisions that it seeks to include in all new leases.

SUPR is targeting that all its supermarkets will be rated EPC C or better by 2028 and B or better by 2030. Currently 84% of SUPR’s portfolio has an EPC14 rating of C or better.

  14 Energy Performance Certificate

Additional company information

Supermarket Income REIT (SUPR) is listed on the Premium Segment of the London Stock Exchange15 and is a constituent of the UK 250 and UK EPRA NAREIT indices. The company has an independent board, comprised of six non-executive directors, chaired by Nick Hewson, and has appointed Atrato Capital as investment adviser. Full details of the company’s leadership team can be found on the SUPR website.

  15 It initially listed on the traded funds segment in 2017.

Atrato Capital

Atrato Capital (‘Atrato’) is part of Atrato Group, a market leading investment and advisory group established in 2016. The Atrato Group is additionally active in a range of long income strategies including supported housing and clean energy generation, where it is investment adviser to LSE-listed Atrato Onsite Energy.

Atrato’s supermarkets team brings a very high level of experience and knowledge of the UK sector, having advised on, structured and executed more than £5.0bn of supermarket transactions (including more than £1.7bn for SUPR). Justin King, widely recognised as one of the UK’s most successful grocery sector leaders, works as a senior adviser to Atrato. He brings a wealth of experience in the grocery sector and a deep understanding of grocery property strategy. He served as chief executive of J Sainsbury for 10 years until 2014, and before that was part of the leadership team at Marks & Spencer and previously held senior roles at Asda.

Competitive fees

SUPR benefits from a competitive fee structure, calculated according to a tiered structure that has allowed shareholders to benefit more fully from the company’s growth. The marginal fee rate is 0.65% of NAV. There is no performance fee and 25% of the investment advisory fee is paid in shares.

Exhibit 25: Investment adviser fees on NAV (less uninvested cash)

Up to £500m

0.95%

£500m–1.0bn

0.75%

£1.0–1.5bn

0.65%

£1.5–2.0bn

0.45%

Above £2.0bn

0.40%

Source: Supermarket Income REIT

Sensitivities

The commercial property market is cyclical, historically exhibiting substantial swings in valuation through cycles. Income returns are significantly more stable, but still fluctuate according to tenant demand and rent terms. On a relative basis, markets generally expect supermarket property to be less volatile than broader property markets given the defensive nature of the underlying grocery sector. We consider the main sensitivities to include:

Economic risk: the war in Ukraine and sharp rising inflation and interest rates have created a high level of uncertainty regarding the global and UK economic outlook and represent a continuing risk to income, funding costs and asset values.

Tenant risk: the failure of any of the tenants could negatively affect contractual incomes if this involved a void period or a need to re-let the space on less advantageous terms. It could create pockets of excess supermarket property over-supply with a negative impact on assets values. SUPR seeks to mitigate this risk by targeting institutional-grade tenants with multi-billion-pound revenues and strong consumer brands.

Over-renting. long-term indexed leases can cause in-place rents to rise above market rent levels with a negative impact on residual value. This has become much less likely, with SUPR’s inflation-linked rent increases capped at c 4%, and recent high inflation lifting store turnover and market rent levels. Asset management opportunities during the 13-year WAULT, including lease regears, provide additional protection.

Energy performance considerations: a failure to successfully meet regulatory and/or tenant expectations for energy performance enhancement would likely affect SUPR’s ability to let properties on satisfactory terms and may make properties unlettable. SUPR is well on track to meet the expected requirements and benefits from close alignment with its tenants’ own improvement programmes.

Interest rate risks: all debt is fixed rate or hedged against rising interest rates with an average duration of around four years as of 30 June 2023. However, a longer period of sustained high interest rates would further increase funding costs and may have a negative impact on property valuations. Indexed linked rental uplifts provide an offset to any increase in future funding costs.

Funding risk: SUPR requires access to funding to meet existing debt maturities as they arise and to support future portfolio growth. Headroom on existing facilities, strong relations with a broad range of lenders, an investment grade credit rating and structural support for the grocery sector are all positive indicators, as are currently moderate gearing and strong interest cover.

Management risk: SUPR is externally managed and is dependent on the ability of its asset manager to execute successfully on its strategy.

Exhibit 26: Financial summary

Year ended 30 June (£m)

2021

2022

2023

2024e

2025e

2026e

INCOME STATEMENT

Rent receivable

46.2

69.7

93.3

103.9

107.5

111.8

Rent smoothing adjustment

2.0

2.7

2.5

3.0

3.0

3.0

Net service charge expense

(0.2)

(0.3)

(0.6)

(0.4)

(0.3)

(0.2)

Total rental income

47.9

72.1

95.2

106.5

110.2

114.6

Administrative & other expenses

(9.3)

(13.9)

(15.4)

(13.9)

(14.2)

(14.5)

Change in fair value of investment properties

36.3

21.8

(256.1)

(1.3)

42.0

27.9

Share of profit of associate

15.5

43.3

23.2

0.0

0.0

0.0

Gain on disposal of associate

19.9

0.0

0.0

0.0

Operating profit/(loss)

90.5

123.3

(133.1)

91.3

138.0

128.1

Net finance expense

(8.5)

(13.0)

(24.7)

(16.7)

(18.9)

(23.3)

Change in fair value of interest rate derivative

0.0

0.0

10.0

(10.0)

(10.0)

(10.0)

Gain on disposal of interest rate derivative

0.0

0.0

2.9

0.0

0.0

0.0

Profit/(loss) for the period

82.0

110.3

(144.9)

64.6

109.1

94.7

Adjust for:

Changes in fair value of investment property

(36.3)

(21.8)

256.1

1.3

(42.0)

(27.9)

Impact of associate

(8.9)

6.0

(31.4)

0.0

0.0

0.0

Impact of interest rate derivative

0.0

0.0

(22.6)

10.0

10.0

10.0

EPRA earnings

36.8

57.4

57.2

75.9

77.1

76.8

Finance income on interest rate derivative

0.0

0.0

9.7

0.0

0.0

0.0

Non-recurring

0.0

0.0

5.5

0.0

0.0

0.0

Adjusted EPRA earnings

36.8

57.4

72.4

75.9

77.1

76.8

EPRA cost ratio inc. direct vacancy costs

16.8%

16.5%

15.5%

13.0%

12.8%

0.0%

Closing number of shares (m)

810.7

1,239.9

1,246.2

1,246.2

1,246.2

1,246.2

Average number of shares in issue (m)

652.8

975.2

1,242.6

1,246.2

1,246.2

1,246.2

IFRS EPS (p)

12.6

11.3

(11.7)

5.2

8.8

7.6

EPRA EPS (p)

5.6

5.9

4.6

6.1

6.2

6.2

Adjusted EPRA EPS (p)

5.6

5.9

5.8

6.1

6.2

6.2

DPS declared (p)

5.86

5.94

6.00

6.06

6.12

6.18

Dividend cover (adjusted EPRA earning/dividends paid)

104%

108%

97%

101%

101%

100%

EPRA NTA total return

12.1%

12.5%

-14.1%

6.5%

10.3%

8.7%

BALANCE SHEET

Investment property

1,148.4

1,561.6

1,685.7

1,725.3

1,770.2

1,801.2

JV

130.3

177.1

0.0

0.0

0.0

0.0

Other non-current assets

131.3

193.1

48.0

58.4

48.4

38.4

Total non-current assets

1,279.7

1,754.7

1,733.7

1,783.7

1,818.6

1,839.6

Trade & other receivables

3.1

1.86

142.2

5.4

5.6

5.8

Cash & equivalents

19.6

51.20

37.5

35.2

32.3

29.3

Other current assets

0.2

0.28

20.4

0.0

0.0

0.0

Total current assets

23.0

53.35

200.0

40.6

37.9

35.1

Borrowings

0.0

0.0

(61.9)

0.0

0.0

0.0

Trade &other payables

(8.4)

(10.7)

(27.0)

(16.1)

(16.7)

(17.4)

Other current liabilities

(12.1)

(16.4)

(21.6)

(21.6)

(21.6)

(21.6)

Total current liabilities

(20.4)

(27.0)

(110.4)

(37.7)

(38.2)

(39.0)

Bank borrowings

(409.7)

(348.5)

(605.6)

(579.6)

(578.3)

(577.8)

Interest rate derivatives

(1.2)

0.0

0.0

0.0

0.0

0.0

Total non-current liabilities

(410.9)

(348.5)

(605.6)

(579.6)

(578.3)

(577.8)

Net assets

871.3

1,432.5

1,217.7

1,207.0

1,240.0

1,258.0

Adjust for:

Fair value of derivatives &financial assets, intangibles

0.4

(5.9)

(61.2)

(51.2)

(41.2)

(31.2)

EPRA net tangible assets (NTA)

871.7

1,426.6

1,156.5

1,155.8

1,198.8

1,226.8

IFRS NAV per share (p)

107

116

98

97

100

101

EPRA NTA per share (p)

108

115

93

93

96

98

CASH FLOW

Net cash from operations

42.8

63.0

84.3

106.1

93.4

97.7

Acquisition & investment in investment property

(570.0)

(388.7)

(377.3)

(37.9)

0.0

0.0

Net investment in associate

(58.7)

(3.5)

103.1

116.9

0.0

0.0

Other investing activity

(0.9)

(10.6)

0.5

(7.5)

0.0

0.0

Net cash from investing activity

(629.5)

(402.8)

(273.7)

71.5

0.0

0.0

Share issuance (net of costs)

345.6

496.4

(0.1)

0.0

0.0

0.0

Debt drawn/(repaid)

284.7

(61.1)

313.6

(87.4)

(0.8)

0.0

Interest paid and other financing costs

(9.3)

(12.7)

(64.7)

(17.2)

(19.4)

(23.8)

Dividends paid

(34.9)

(51.1)

(68.0)

(75.3)

(76.1)

(76.8)

Other financing activity

(5.2)

Net cash from financing activity

586.0

371.5

175.7

(179.9)

(96.3)

(100.6)

Change in cash

(0.8)

31.6

(13.7)

(2.3)

(2.9)

(3.0)

Opening cash

20.4

19.6

51.2

37.5

35.2

32.3

Closing cash

19.6

51.2

37.5

35.2

32.3

29.3

Debt as per balance sheet

(409.7)

(348.5)

(667.5)

(579.6)

(578.3)

(577.8)

Net debt

(390.1)

(297.3)

(630.0)

(544.3)

(545.9)

(548.4)

LTV

34.0%

19.0%

37.4%

31.6%

30.8%

30.4%

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

Contact details

Revenue by geography

Atrato Group

4th floor, 36 Queen Street
London EC4R 1BN
UK
+44 20 3790 8087
www.supermarketincomereit.com

Contact details

Atrato Group

4th floor, 36 Queen Street
London EC4R 1BN
UK
+44 20 3790 8087
www.supermarketincomereit.com

Revenue by geography

Leadership team

Non-executive chairman, Supermarket Income REIT: Nick Hewson

Principal, Atrato Capital: Ben Green

Nick Hewson was co-founder, CEO and chairman of Grantchester Holdings, where he worked from 1990 until 2012. Nick serves as a non-executive director and chair of the audit committee at Redrow, a UK 250 company and one of the UK’s leading housebuilders. Prior to this, Nick was chair of the executive committee of Pradera AM, a European retail property fund management business. Nick was also a founding partner of City Centre Partners.

Ben co-founded the Atrato Group in December 2016 and is responsible for leading the development and execution of the firm’s long-term strategy. He has over 20 years’ experience structuring and executing real estate transactions and has completed more than £3.5bn of supermarket sale and leaseback transactions. Ben qualified as a lawyer in 1997 and began his career at Wilde Sapte and Linklaters LLP. He left law in 2000 and has since spent his banking career at Barclays, Lloyds and Goldman Sachs where he was managing director, European head of structured finance.

Principal, Atrato Capital: Steve Windsor

Chief investment officer, Atrato Capital: Steven Noble

Steve co-founded the Atrato Group in December 2016 and is responsible for leading the development and execution of the firm’s long-term strategy. He spent 16 years at Goldman Sachs specialising in finance and risk management, becoming a partner in 2008 and headed the European Debt Capital Markets and Risk Management businesses from 2010 until 2016. Steve has helped and advised a number of UK 100 companies on how to finance their business and manage risk.

Steven is a co-founder of the Atrato Group and is responsible for the overall investment strategy for the group. He trained as a chartered accountant at KPMG, following which he spent nine years at Lloyds Banking Group in a variety of risk management and origination roles, structuring a range of capital markets transactions, with a primary focus on commercial real estate. Steven has extensive experience of supermarket property.

Managing director, supermarkets, Atrato Capital: Robert Abraham

Finance director, supermarkets, Atrato Capital: Haffiz Kala

Rob joined the Atrato in May 2019 and is responsible for managing the supermarkets investment fund for the group. Prior to joining Atrato, Rob spent eight years at Lloyds Bank, most recently in the loan markets business working with borrowers and lenders across the corporate, funds and real estate sectors. His experience includes syndication of significant event-driven debt facilities to support M&A activity involving UK 100 companies.

Haffiz joined the Atrato Group in November 2020 and is responsible for the finance, tax and operations of the supermarkets investment fund. Haffiz has over 14 years’ experience in the investment management industry. Prior to joining Atrato, Haffiz spent four years at PIMCO, focusing on the financial control and treasury for its private equity, real estate and credit funds. He also served as a senior manager in the audit practice at PricewaterhouseCoopers, performing audit and advisory services within the investment management industry.

Principal shareholders (source: Supermarket Income REIT annual report. Data as at 19 September 2023)

(%)

Blackrock

5.5

Schroders

5.1

Quilter

5.0

American Financial

5.0

Waverton Investment Management

3.8


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.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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