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Supermarket Income REIT builds presence in grocery sector with Sainsbury's deal

Snapshot

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

Price: 112.25 GBX

LSE:SUPR
Market: LSE
Market Cap: £531.64 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 work?

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's doing

At the end of April, Supermarket Income successfully doubled the size of a fundraising to its target of £139.8mln from a substantially oversubscribed placing.

The aim is to purchase two supermarket properties with a value of around £115mln, with a further pipeline of assets having been identified with an approximate value of £180mln.

As the grocery sector is benefitting from the coronavirus crisis, the property owner received 100% of its expected rent payments for the March quarter even earlier.

Following reviews at one of its Tesco superstores and a Morrisons supermarket since the start of the year, the total rent from the portfolio increased to £28.4mln from £28.03mln.

It is keeping the target of 5.8p per share for the total dividend.

Sainsbury's portfolio 

in May, the trust joined forces with the British Airways pension fund to buy a 25.5% stake in one of the UK’s largest portfolio of J Sainsbury PLC (LON:SBRY) stores.

The 50:50 joint venture will pay vendor British Land PLC (LON:BLND) £102mln for the stake in the portfolio, which comprises 26 Sainsbury stores predominately based in London and the south-east.

After the transaction, Sainsbury's will own 49% of the freeholds of the properties, insurance group Aviva 25.5% and the JV the remaining 25.5%. 

In a statement, Supermarket Income REIT said it will contribute £51mln as its share of the purchase consideration, noting that the portfolio is currently funded by bonds, which mature in 2023.

What the boss says: Nick Hewson, chairman

“The ability of omnichannel supermarkets to supply the local communities they serve has never been more important than it is now in response to [coronavirus]."

"As a board, we are fortunate during these difficult times to be able to raise capital to offer liquidity to vendors of supermarkets who may need the proceeds for other purposes."

“With the sector trading robustly in the current climate, our investment strategy remains focused on delivering stable, long-term, inflation-protected income through investing in the future model of UK Grocery."

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Inflexion points

  • Just acquired a stake in 26 Sainsbury's outlets through JV with British Airways pension fund
  • Continues to pay a dividend
  • Potentially one of the winners in the coronavirus crisis

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