Supermarket Income REIT PLC has announced its intention to float on the London Stock Exchange as it looks to take advantage of the upturn in the supermarket sector.
The company is looking to raise £200mln at its initial public offering (IPO) and will use the money to snap up a “diversified portfolio of supermarket real estate assets in the UK”.
Essentially, Supermarket Income REIT will buy the freehold to several plots of land currently being leased out to supermarkets and will generate returns for shareholders through the rent collected.
Long leases and ‘high quality tenants’
The firm has deals for two sites ready to go and is in advanced discussions with the owners of three more. In total, the five assets will cost £263mln to acquire.
All of those plots are currently leased out to J Sainsbury plc (LON:SBRY) and Tesco PLC (LON:TSCO) with an average of 17 years still left on the contracts and return a net yield of 4.9%.
This is exactly what Supermarket Income is looking for; long, inflation-linked leases (typically more than 15 years to expiry of first break), with one of the ‘Big Four’ supermarkets.
Given the “long-term and secure income stream” of the leases, the company is targeting an initial dividend yield of 5.5%, which it expects to grow progressively.
“The supermarket sector currently represents a compelling real estate opportunity,” said chairman Nick Hewson.
“Supermarkets provide secure, long-term income combined with the potential for substantial capital growth.
“The company has a very strong management team, which has executed the majority of the supermarket property sale-and leasebacks in the UK, and a very experienced board of directors.”
Asset management opportunities
Supermarket Income REIT has also said it will look to buy assets that have the potential for alternative use over the longer term.
For example, it might look to snap up a supermarket plot in a highly-populated area and with strong transport links that could be changed into residential if needed.
Sites with near term potential, such as those with large car parks or space for improved configuration and development, will also be looked at.
The company’s first day of trading on the LSE is expected to be 21 July.