The bank’s initial share price target was 130p in a note published on Monday.
With an ever-growing portfolio of 49 high quality, large-format supermarkets across the UK, all let to large, national supermarket operators with 85% of income secured on inflation-linked long-dated leases, analysts Kieran Lee and Tom Horne said Supermarket Income REIT offered a secure, growing income and potential capital upside.
The portfolio is expected by the analysts to grow by another 40% out to 2023, growing EPRA earnings per share 12.6% by that year and generating average total returns of 10%.
“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.”
Amid low interest rates, a continued supply of investment opportunities and the strong operational performance of UK grocers, the REIT faces “an attractive investment environment” and seems to have a sizeable pipeline of investment opportunities.
The persistent low interest environment, as well as IFRS 16 factors, point to further investment demand and drives what the analysts said was a “conservative" forecast for revaluations of 7.0%, increasing NAV by 4.3% out to 2023.
Despite being let on long-dated, inflation-linked leases, Supermarket Income REIT’s buildings yield 5.0%, allowing it to pay a dividend equating to a forecast 2021 yield of 5.6%.
With this a 420 basis point premium to the 1.4% average yield on the publicly traded debt of its largest tenant, Tesco, the analysts said this provides “an attractive income arbitrage opportunity, in addition to capital returns”.