Supermarket Income REIT H2 Earnings Call Highlights

Key Points

• Portfolio growth: Supermarket Income REIT’s gross asset value rose to £2.2 billion, with 140 fully occupied supermarkets, 83% inflation-linked income and an average lease length of 11 years. The company completed £676 million of accretive acquisitions and aims to double its portfolio to £4 billion.
• Financing strengthened: About £1 billion of debt financing, including its first public bond, extended average debt maturity to 3.6 years, with no refinancing needs until June 2028. Debt costs average 4.4%, and 98% of borrowings are fixed or hedged through June 2028.
• Dividend outlook: Dividend cover was 93% due to temporary cash drag and higher financing costs, but management expects coverage to approach full coverage in fiscal 2027 and thereafter. It reaffirmed a minimum 2% dividend increase for the coming year, with the shares offering an approximately 7.5% yield.

Supermarket Income REIT LON: SUPR said it expanded its portfolio and strengthened its financing platform during the year, positioning the business to pursue earnings growth and support a minimum 2% dividend increase in the coming year.

The company said its gross asset value, including its 50% share of a joint venture, reached £2.2 billion, compared with £1.6 billion about a year earlier. The portfolio comprises 140 supermarkets, is fully occupied, and has an average lease length of 11 years. About 83% of income is linked to inflation and roughly 75% is derived from investment-grade tenants, management said.

At the current share price, the company said its dividend yield was about 7.5%. Management also highlighted an EPRA cost ratio of 9.2%, saying it expects the ratio to continue declining as the platform expands.

Financial performance and capital deployment

Chief Financial Officer Mike Perkins reported net rental income of £122 million, up 6% year over year. EPRA earnings were 5.7 pence per share, down 4%, while net asset value per share increased marginally to 87.5 pence from 87.1 pence. The company reported a total accounting return of 7.5%, which Perkins said was largely driven by income rather than valuation gains.

The company completed £676 million of earnings-accretive acquisitions since July of the prior year, funded in part through capital released from its joint venture with Blue Owl. The joint venture had grown to £855 million, while Supermarket Income REIT transferred £635 million of assets into the vehicle.

Perkins said the assets transferred to the joint venture were disposed of at an average yield of 6.2%, with proceeds recycled into acquisitions at a 6.8% yield. Including management-fee income from the joint venture, the company estimated a spread of around 120 basis points over the yield on assets sold.

The company also raised £100 million in equity in July, its first equity raise since 2022. It said the proceeds were fully deployed within two months, alongside related debt financing, into nine grocery properties valued at £222 million. Those acquisitions had a 6.6% net initial yield, with 82% of income supported by investment-grade tenants and 87% linked to inflation.

• A Tesco store in Edinburgh with five years remaining on its lease.
• A newly built Sainsbury’s logistics warehouse in Avonmouth near Bristol.
• An M&S-anchored retail park in Nottinghamshire with an upcoming open-market rent review.

Financing and dividend coverage

During the year, Supermarket Income REIT completed about £1 billion of debt financings, including its debut public bond. Perkins said the activity improved the company’s debt maturity profile, extending average maturity to 3.6 years from 2.8 years despite the passage of a year. The company has no refinancing requirements until June 2028, according to management.

The average cost of debt was about 4.4%, with 98% of debt fixed or hedged through June 2028. The company’s leverage stood at 45% following deployment of the equity raise. Perkins said management views that level as broadly an upper limit, although leverage could temporarily rise for a transaction before being brought back to 45% or below.

Dividend cover was 93% for the year, reflecting cash drag while capital from the joint venture was redeployed and increased debt costs following the bond issuance, Perkins said. He characterized those factors as largely one-off effects and said analyst consensus indicated the company would be close to dividend cover in fiscal 2027 and fully covered thereafter.

“The key for us is that the dividend is sustainable,” Perkins said, adding that the company’s 2% dividend-growth guidance is a minimum target.

Growth strategy and supermarket market trends

Management reiterated its ambition to double the portfolio from about £2 billion to £4 billion, though it did not establish a timetable. The company said it would only pursue growth where acquisitions are accretive. Based on the £676 million acquired over the past year, management said doubling the asset base could take as little as two to three years in a favorable environment.

The potential future portfolio mix includes grocery-anchored retail parks, European food stores and grocery distribution assets. The company has already acquired its first logistics asset and said it sees opportunities in Spain, Portugal and Ireland, while describing Italy and Germany as possible markets. Management said it was not rushing into new countries and noted that its most recent deployment was entirely in the U.K.

The company said omnichannel grocers, particularly operators with large-format stores, continued to capture sales growth. It cited Tesco’s reported annual revenue of £44 billion, a 28% U.K. market share and a 37% share of the online channel. Management said large-format stores offer consumers lower prices, wider product ranges and higher product availability than convenience formats.

Supermarket Income REIT also pointed to lease-management opportunities. It renewed two large-format store leases in July, resetting each to 15-year terms. One renewal included a 15% rent reduction while the other renewed at passing rent, resulting in an average reduction of 7%, but management said the renewals involved no rent-free periods or landlord capital contributions and were expected to support property valuations.

Management said it continues to see evidence of rental growth from former Homebase units being converted into food stores, including new leases signed by M&S and Sainsbury’s. It also cited a Waitrose store in Surrey that received a 16% uplift at open-market rent review.

Looking ahead, the company said it has multiple funding avenues for growth, including equity issuance, joint ventures, debt markets and capital recycling. Management said its focus remains on transactions that are accretive and generate value for shareholders.

About Supermarket Income REIT (LON:SUPR)

Supermarket Income REIT plc (LSE: SUPR, JSE: SRI), a FTSE 250 company, is the only LSE listed company dedicated to investing in grocery properties which are an essential part of national food infrastructure. The Company focuses on grocery stores which are predominantly omnichannel, fulfilling online and in-person sales and are let to leading supermarket operators in the UK and Europe. The Company's properties earn long-dated, secure, inflation-linked, growing income. SUPR targets a progressive dividend and the potential for long term capital growth.

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