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Supermarket Income REIT is top pick for yield hunters in real estate, say analysts

The bank’s initial share price target was 130p versus Friday's close price of 106.5p

Supermarket Income REIT PLC -
Tesco is a major tennant of the trust

Supermarket Income REIT PLC (LON:SUPR) shares are the “top pick” for income for the real estate sector, said Berenberg as its started coverage of the investment trust with a ‘buy’ rating.

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”.

Quick facts: Supermarket Income REIT PLC

Price: 107.5 GBX

LSE:SUPR
Market: LSE
Market Cap: £716.01 m
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