Half year Results

The Board of Directors of Supermarket Income REIT plc (LSE: SUPR), the real estate investment trust providing secure, inflation-linked, long income from grocery property in the UK, reports its interim results for the Group for the six months ended 31 December 2022 (the “Period”).

FINANCIAL HIGHLIGHTS

Six months to 31 Dec 2022

Six months to

31-Dec-21

 

Annualised passing rent – £95.5m, UP 36% (31 Dec 2021: £70.2m)

Adjusted Earnings  – £36.4m, UP 35% (31 Dec 2021: £26.9m)

Operating profit –  £38.0m, UP 44% (31 Dec 2021: £26.4m)

Changes in fair value of investment properties – (£248.1m) (31 Dec 2021:£11.0m)

Dividend paid per share 3 pence per share (31 Dec 2021: 3 pence per share)

Adjusted EPS: 2.9 pence DOWN 5% (31 Dec 2021: 3.1 pence)

Dividend cover 0.98x (31 Dec 2021: 1.13x)

 

IFRS net assets: £1,198m, DOWN 16% (31 Dec 2021: £1,432m)

EPRA NTA: £1,147m, DOWN 20% (31 Dec 2021: £1,427m)

EPRA NTA per share: 92 pence DOWN 20% (31 Dec 2021: 115 pence)

Loan to value (Direct Portfolio): 40.0%, (31 Dec 2021: 19.0%)

Portfolio net initial yield: 5.5% (31 Dec 2021: 4.6%)

 

Strong growth momentum

• 36% increase in annualised passing rent
• 3.7% average annualised rental uplift in the Period
• 8.8% increase in grocery market
• Operator revenues at record levels benefitting from non-discretionary expenditure
• 80% of leases with inflation-linked rent reviews and 100% of rent collected

Handpicked, high-quality portfolio of 50 supermarkets

• Strong tenant covenants; 75% of income from Sainsbury’s and Tesco
• Future-proofed portfolio of omnichannel stores
• Capturing elevated online grocery demand, up 80% since 2019
• 14 years weighted average unexpired lease term (“WAULT”)

Prudent management of the balance sheet, protecting earnings and maintaining a sustainable dividend

• Flexibility to deploy capital via accretive acquisitions and/or return excess capital to shareholders
• Transition to unsecured financing via new six-year £412 million facility
• Drawn debt 100% fixed (or hedged to fixed) at 2.9% weighted average cost
• Fitch Ratings Limited (“Fitch”) reaffirmed the Company’s Investment Grade credit rating of BBB+
• Post-balance sheet monetisation of the Sainsbury’s Reversion Portfolio (“SRP”) generating minimum cash proceeds of £430 million and money-on-money multiple of 1.9x and IRR of 30%[10], with pro forma LTV expected to decline to below 30% in July 2023
• On track to deliver full-year 2023 target dividend of 6 pence per share

Valuation reflects impact of market repricing due to higher interest rates and macroeconomic environment

• Direct Portfolio independently valued at £1.63 billion (30 June 2022: £1.56 billion)
• Net initial yield (“NIY”) of 5.5% as at 31 December 2022 (30 June 2022: 4.6%)
• 13.3% downward valuation adjustment on a like-for-like basis compared with MSCI All Property Capital Index reduction of 19%

Commitment to sustainability and governance

• Signatories of the Net Zero Asset Managers Initiative (“NZAM”) as of March 2023, associated United Nations Principles of Responsible Investment’s (“UNPRI”) pledge on carbon emissions
• EV charging to be installed at eight supermarket sites
• New Tesco 20-year PPA for rooftop solar installation to be installed Summer 2023

Nick Hewson, Chairman of Supermarket Income REIT plc, commented:

“This Period has seen a very strong underlying performance of the grocery sector with the most recent data from Kantar showing 8.8%[11] sales growth on the prior year and annualised sales now exceeding the levels seen at the height of the pandemic.

While property valuations have decreased as a function of broader interest rate policy changes, our balance sheet remains strong. We have sold assets, shortly after the Period end, worth c.40% of our market capitalisation which brings net proceeds of at least £430 million over the course of the next few months. The Board commits to utilise these funds in the most accretive way for shareholders.

We have a high quality, handpicked portfolio of supermarket property with 100% rental collection, benefitting from being in the non-discretionary spend sector of grocery. Our secure rental income is 80% linked to inflation. Our debt is 100% fixed (or hedged to fixed) giving us a high degree of certainty of cashflows and, therefore, dividend over the medium term.”

News alert

VIDEO: Supermarket Income REIT

The sale completes the previously announced acquisition by Sainsbury’s of 21 of the 26 SRP Portfolio properties and concludes the contractual unwind of the SRP Portfolio structure (see further information below).

The transaction is expected to close on 17 March 2023 with the £430.9 million consideration received in three tranches. £279.3 million will be received on 17 March 2023 and £116.9 million on 10 July 2023. The third tranche of £34.7 million is conditional on the sale of the remaining five stores in the SRP Portfolio.

Sainsbury’s has entered into new 15-year leases on four of the five remaining stores, with five yearly open market rent reviews and a tenant break option in year ten. Following completion of the transaction, SUPR has an option to acquire these four stores benefitting from the new Sainsbury’s 15-year leases for a net consideration of £28.3 million (net of SUPR’s existing interest and excluding acquisition costs). It is expected that the one remaining store will be sold at vacant possession value.

SUPR’s investment in the SRP Portfolio has generated a highly attractive return for shareholders and following this transaction, it is estimated that the investment will have provided a money-on-money multiple of 1.9x and an IRR of 30%1.

Use of proceeds

The net proceeds are expected to be used to reduce the Company’s existing debt facilities, further strengthening the Company’s balance sheet. Based on the Company’s last published portfolio valuation as at 31 December 2022, the Company’s LTV is expected to decline to c.34.4% in March 2023 and c.29.7% in July 2023 following receipt of the first two tranches of the consideration2.

Ben Green, Director of Atrato Capital Limited, the Investment Adviser to Supermarket Income REIT plc, said:  

“This investment has been highly accretive for our shareholders and is further evidence of the long-term strength and value of UK grocery property.”

Patrick Dunne, Director of Group Property, FM & Procurement at Sainsbury’s, commented:

“We are pleased to have reached a positive outcome to conclude our joint venture and look forward to continuing to work with Supermarket Income REIT in the future.”

Below is a video, shot with the investment team of Atrato Group, the advisors behind SUPR, highlighting the Group’s investment strategy