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Supermarket Income REIT portfolio rises to nine stores with Cheltenham acquisition

Snapshot

  • Buys larger supermarket sites on long leases
  • Offers bond-like yields
  • Future-proofed on supermarkets’ omni-channel model
  • Recently acquired two Sainsbury's outlets in Preston and Cheltenham
tesco

Quick facts: Supermarket Income Reit PLC

Price: 107.5 GBX

LSE:SUPR
Market: LSE
Market Cap: £363.21 m
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​​​​​​What it does

Supermarket Income Reit PLC (LON:SUPR) is an investment trust that specialises in the supermarket freehold and long-leasehold property.

Set up two years ago and listed on London’s main market, Supermarket Income’s current portfolio comprises nine stores – five occupied by Tesco, three by Sainsbury’s and one by Morrisons.

The company was set up by an ex-Goldman Sachs pair, Ben Green and Steve Windsor, who used to work with supermarkets to sell and lease back stores, carrying out several billion pounds worth of deals over the years.  

With the advent of IFRS accounting rules, meaning that assets that supermarkets had been able to class as off their balance sheet now were being classed on their balance sheet, Green and Windsor saw a consolidation role would be profitable.

They set up Atrato Capital, which is the trust’s adviser and since March has counted ex-Sainsbury’s chief executive Justin King as a senior investment advisor.

 

How does the trust work?

Purchases are made only of supermarket property with long unexpired lease terms, with a targeted average lease term of more than 15 years, leased only to the UK’s big four supermarkets on upward only rental contracts to provide investors with income security and considerable inflation protection.

Investments may in future be made in assets let to other supermarket operators such as Aldi, Lidl, Marks & Spencer or Waitrose.

Raising new money for investments is done each time an investment is identified, with £100mln raised on IPO in summer 2017, followed by £30mln later that year, £75mln last year, £45mln in March and £100mln just this month.

A 12-month extension was agreed for the maturity date on the £100mln revolving credit facility with HSBC to 30 August 2021.

 

Future-proof model

While the supermarket sector has hardly been having the easiest of times in recent year, with German discounters Aldi and Lidl storming the castle, the industry is not going anywhere.

Furthermore, one of the many boxes that supermarket properties need to tick in order to make it into the trust’s portfolio is that they need to be “future-proof”, that is they must be larger stores operating both as a physical supermarket and as a fulfilment centre for the supermarket’s online grocery operations.

This is because Green and Windsor see the store-pick model of online grocery as the only truly viable option for the industry in the short, medium and long term.

“Online grocery is very different from general retail,” says Green. “Operationally its very complicated to do a the customer needs one-hour slots, the trucks need to maintain three different temperature zones.

“Most importantly is distance. Apart from in London, the model requires the companies to use existing physical stores in an omnichannel capacity, for their proximity to the customer, via click-and-collect or for store-picked deliveries.”

Indeed, this is why Amazon snaffled Wholefoods and why Chinese online giant Alibaba’s Hema stores are sweeping through China.

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What’s the investment case?

  • Dividend target for year to June 2020 of 5.8p 
  • Based on the forecast dividend, the forward yield is 5.66% at 102.5p with bond-like properties.
  • Windsor says: "The biggest catalyst for a yield shift if there is a re-rating of Tesco's balance sheet." 
  • Credit rating agency Moody's moved its rating on Tesco back to investment grade in June, following Fitch and with S&P expected to join in too. 

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