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Supermarket Income REIT gets tailwind from buoyant grocery sector

Snapshot

  • Buys large supermarket sites on long leases
  • Well-placed in the coronavirus crisis
  • Future-proofed on supermarkets’ omnichannel model
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Quick facts: Supermarket Income REIT PLC

Price: 107.5 GBX

LSE:SUPR
Market: LSE
Market Cap: £716.01 m
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​​​​​​What it does

Supermarket Income Reit PLC (LON:SUPR) is an investment trust that specialises in grocery store freeholds and long leasehold property.

Supermarket Income’s current portfolio comprises sites occupied by Tesco, Sainsbury’s and Morrisons supermarket stores.

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 operate?

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.

In the short-term, the firm is looking for interesting opportunities to acquire new spaces from other companies needing to make a sale.

 

How it is doing

Supermarket Income REIT PLC (LON:SUPR) said its focus on properties that have omnichannel potential had been validated by the surge in online grocery sales during the pandemic.

Nick Hewson, chairman, said: “The last 12 months have highlighted the critical role of grocery property in the UK's feed the nation infrastructure.

“Our supermarkets play a key role in supporting the response of the UK grocery sector to the pandemic and as a result we have experienced strong property investor interest in our market and consequently a tightening of yields.

The trust focuses on sites occupied by the UK’s big four major grocery chains and the value of its direct holdings rose by 5.5% in the six months to December 2020 with NAV per share improving to 104p from 101p.

The REIT bought 13 supermarket properties worth £314mln during the latest six months, with a further £177mln invested in the second half of the year.

 

What the boss says: Nick Hewson, chairman

“We have a high degree of certainty of income through the Group's long, upward-only, inflation-linked rental uplifts, leased to tenants with undoubted covenants.

“Throughout the COVID-19 crisis this has been borne out as we collected 100% of rents with no defaults, deferrals, or rent reductions.”

Inflexion points

  • Continued expansion across the UK grocery sector
  • Continues to raise the dividend
  • One of the winners in the coronavirus crisis

What analysts say

Berenberg started covering the stock with a 'buy' recommendation and 130p target price in January, saying it's the top pick for income for the real estate sector.

“The COVID-19 pandemic has highlighted the resilience of the supermarket sector,” the analysts said, with all of SUPR’s assets having remained open throughout the pandemic, with 100% of rent collected and consumer spend within UK supermarkets having increased by 11%.

“We expect online grocery penetration rates to continue to rise beyond the pandemic, with larger assets, such as those owned by SUPR, allowing for in-store concessions, fulfilment areas for online deliveries and large car parks that facilitate click and collect services.

“In addition, with supermarket operators selecting stores on the basis of being within a 30-minute drive of catchment areas, this works in reverse for last-mile online fulfilment.”

 

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Supermarket Income REIT reaps the benefits of grocery shopping demand

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