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Supermarket Income REIT
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== SUPR’s JV investment has been highly successful == SUPR’s investment, through its 50:50 JV with British Airways Pension Fund (BAPF), in a beneficial interest the Sainsbury’s Reversion Portfolio (‘the reversion portfolio’), has been a highly successful investment in line with its investment case detailed below. Including attractive recurring earnings and capital growth in the portfolio’s supermarket assets, the value of SUPR’s £108.5m investment (before costs) has already increased to £167.5m with the c £60m gain to date representing an internal rate of return of 19%. Driven by recurring earnings we estimate it will reach c £184m before cash distributions back to SUPR in the second half of 2023, providing significant capital for redeployment. The reversion portfolio, one of the largest in the UK, comprising 26 high-quality supermarkets, was created by Sainsbury’s in 2000 through two sale and leaseback transactions (Highbury Finance and Dragon Finance). Sainsbury’s retains the remaining 49% beneficial interest in the portfolio, occupies the stores and pays all the rents under the current occupational leases, which expire in March 2023 and July 2023. The rental income is used to service and repay the debt of the securitisation vehicles, generating a steady increase in their net assets before any changes in portfolio property valuations. SUPR’s JV with BAPF was formed in May 2020 to acquire from British Land Plc an initial 25.5% stake in the reversion portfolio for £102m (excluding acquisition costs). In February 2021 the JV acquired a further 25.5% stake in this portfolio from Aviva for £115m (excluding acquisition costs). Both transactions reflected a discount to prevailing net asset value, which has since increased as described above. The increase in the value of SUPR’s investment in the JV reflects its share of the increase in the net asset value of the securitisations. Sainsbury’s had the option to repurchase stores from each of the sale and leaseback transactions ahead of the lease expiry and has done so over 21 of the 26 stores,7 while the remaining five stores remain under negotiation with Sainsbury's. The price that Sainsbury’s will pay to acquire the stores over which its purchase option has been exercised will be fixed at the expiry of the leases and based on the market value of an assumed new 20-year lease to Sainsbury's with the initial rent set at the higher of passing or open market, subject to upward-only, five-yearly market rent reviews. The transactions will be completed in March and July 2023 respectively on the expiry of the current occupational leases. Until then, Sainsbury’s will continue to pay rent until completion, and SUPR’s beneficial interest will continue to generate recurring returns. It is not clear at this stage whether Sainsbury’s will continue to occupy the five stores where it has not exercised its repurchase option, but in any case, these will be sold from the securitisation vehicles or refinanced and may provide acquisition opportunities for SUPR. SUPR’s investment case was based on its expectation that Sainsbury’s would remain committed to the stores and its assessment of the quality of the stores,8 and this has been proven by the strong returns generated. Exhibit 4 shows a breakdown of the c £60m uplift in the value of SUPR’s JV investment to date. Of the total revaluation gains to date of £44m,9 c £30m has been generated by Sainsbury’s purchase option exercise and c £14m from yield compression. The cumulative running yield of c £16m (ie, excluding revaluation gains) represents a more than 10% return on investment. The running yield will continue to accumulate until lease expiry, at a current rate of c £12m pa.
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