Supermarket Income REIT continues shopping spree in healthy supermarket sector


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 operate?

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 is doing

SUPR has been on a shopping spree lately: just in January it bought a Morrisons store in Cambridgeshire, a Sainsbury’s supermarket in Wiltshire and a Waitrose supermarket in Hampshire, after adding one Waitrose in December and a Tesco in November.

In February, it bought another slew of J. Sainsbury properties in conjunction with the British Airways pension fund. The 50/50 joint-venture with British Airways Pension Trustees paid GBP115mln for a 25.5% beneficial interest in the Sainsbury’s portfolio, doubling its stake to 51%; Sainsbury’s owns the rest of the portfolio.

In October, Supermarket Income REIT raised GBP200mln (after initially setting out to raise GBP150mln) in a share placing amid strong investor demand.

The funding was pursued as the company sought to take advantage of opportunities that have become available since the onset of coronavirus restrictions.

What the boss says: Ben Green, director of Atrato Capital, the investment adviser to Supermarket Income REIT

“This modern store is a great addition to our growing portfolio of omnichannel stores. The property has strong underlying fundamentals with an attractive lease term providing inflation-linked income in excess of 20 years,” he commented on the latest Morrisons acquisition.


Inflexion points

  • Continued expansion across the UK grocery sector
  • Continues to raise the dividend
  • One of the winners in the coronavirus crisis

What analysts say

Berenberg started covering the stock with a ‘buy’ recommendation and 130p target price in January, saying it’s the top pick for income for the real estate sector.

“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.”

The sentiment was echoed by Peel Hunt, which also started coverage in January with a ‘buy’ recommendation and a 125p target price.

The trust’s management company are experts in the field, says Peel Hunt, and have quickly assembled a GBP1bn portfolio since the IPO three and a half years ago.

Since then, the trust has raised GBP680mln 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.”

Peel Hunt, commenting on the recent Sainsbury’s portfolio stake acquisition, said, “The company continues to deploy capital rapidly and appears to be tracking ahead of our assumptions. The shares trade on an 8% premium and 5.4% dividend yield.”


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