The pandemic has highlighted the scarcity of secure income but Supermarket Income REIT with long leases, 100% rental collection, inflation-linked uplifts, and a portfolio focussed on a winning subsector fits the bill, the broker adds.
The trust’s management company are experts in the field, says Peel Hunt, and have quickly assembled a £1bn portfolio since the IPO three and a half years ago.
Since then, the trust has raised £680mln of new equity and produced shareholder returns of 7%, which is ahead of both the EPRA UK real estate sector (-0.2%) and the FTSE All-Share (1.6%), said Peel Hunt.
“The 23 assets in the wholly-owned portfolio have been purchased at an attractive average net initial yield of 5%, nearly 70% of the income has over 10 years to run on the lease, c.90% of the rent is subject to inflation-linked uplifts and 98% of the rent is paid by Tesco, Sainsbury’s, Morrisons, Waitrose and Aldi.”
Rental collection has been 100% since the COVID-19 outbreak with sales at supermarkets rising through the crisis, helping share prices of the grocers also recover strongly compared to the wider market.
Concerns over the growth of online are overstated adds Peel Hunt, especially as fulfilment potential is a key criterion for Supermarket Income in choosing a site and most online grocery orders are still met by a physical store.
At 108p, the shares trade on an 8% premium to next June’s estimated net asset value, says Peel Hunt, and offer an attractive dividend yield of 5.4%.
“The yield is fully covered by earnings and the inflation-linked rental uplifts should drive future growth.”
Buy is the broker’s investment recommendation with a 125p target price.