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Supermarket Income REIT
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==Sensitivities== The visibility to SUPR’s contractual income is provided by long leases and inflation-linked rent increases. Additionally, the company plans further accretive acquisition of assets. We see the key sensitivities as relating to the following: * The failure of any of the tenants could negatively affect contractual incomes if this involved a void period or a need to re-let the space on less advantageous terms. SUPR seeks to mitigate this risk by targeting institutional-grade tenants with multi-billion-pound revenues and strong consumer brands. * In recent years, supermarket rents linked to inflation have risen faster than open market rents, such that they are in many circumstances above market rent levels. If this were to remain the case, as lease expiry approaches it is likely that property valuations would be negatively affected, reflecting the possibility that rental income would decline at lease expiry unless offset by lease regears or other asset management initiatives. SUPR indicates that its portfolio is not over-rented. Moreover, with SUPR’s inflation-linked rent increases capped at c 4%, the current period of high inflation is likely to mitigate this risk by lifting store turnover. Asset management opportunities during the 15-year WAULT, including lease regears, provides additional protection. * Inflation-linked rent increases provide good income protection against inflation, provided inflation does not rise too far. SUPR’s inflation-linked rents, 85% of the total, are capped at an average level of c 4%. Rental income will lag higher rates of inflation. Were higher rates of inflation to have a negative impact on economic growth, the relative security of the tenant base, and its ability to pass on inflationary supply chain pressures, is in contrast to much of the mainstream commercial property market. * As noted above, debt facilities currently amount to c £794m with an average term to maturity of around four years. Increasing interest rates negatively affect borrowing costs in respect of the fully floating rate debt, but index-linked rates are currently increasing at a faster rate. A material rise in long-term interest rates, also at historically low levels, could negatively affect valuations across the commercial property sector.
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