Supermarket Income REIT PLC's (LSE:SUPR, OTC:SUPIF) increased stake in the J Sainsbury PLC (LSE:SBRY) property reversion portfolio was hailed by broker Shore Capital.
The portfolio contains 26 stores – 21 of which will be acquired by Sainsbury’s for £1.04bn in two tranches in March and July, with SUPR’s share now expected to be £380mln split in two tranches of £264mln and £116mln.
Taking its stake in the portfolio up to 51% from 25.5% "brings SUPR closer to Sainsbury’s in the transaction and well placed as potential sole new owner for the four stores", said Shore Cap analyst Andrew Saunders in a note to clients following the announcement of the deal.
The UK grocery market that "remains structurally robust" with a constrained supply of high-quality superstore assets and while current trading environment is challenging due to a squeezed mass-market consumer and operating cost inflation, the long-term fundamentals "look appealing in our view, particularly in relation to the sector’s position as a leader in omnichannel retail", he said.
SUPR's operational model is "attractive", the broker said, with a blue-chip tenant base with 100% occupancy of its portfolio and leases that are typically 15-20 years long and offer strong inflation-linkage, with strong cash flows supporting a growing dividend.
"We like the investment proposition with SUPR and believe there are appealing long-term attractions with the scaled ownership of UK grocery assets.
"We expect that the current retail environment would be supportive of further sale and lease-back activity in more normal markets."
The current 10% discount to calendar 2023 NTA looks "fair", Saunders wrote, keeping his 'hold' rating on the shares.
He pointed to a "secure" 5.9% calendar 2023 dividend yield expected to also provide "plenty of incentive to remain invested for the longer-term benefits of a reviving real estate market".
Elsewhere, analysts at Stifel noted the majority stake means SUPR will be "uniquely placed in terms of negotiations regarding the future of the SRP assets, and in our view it brings it even closer to Sainsbury's regarding any other future possible property transactions".
For example, it noted that Sainsbury's was engaged in an unrelated £500mln sale and leaseback with LXi REIT only last September, albeit the deal did not complete "due to exogenous Truss-induced chaos".
Stifel estimates the transaction will generate a return of circa £3.6mln, equivalent to a 6.1% annual return.