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Supermarket Income REIT
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== The directly owned portfolio continues to grow and diversify == '''Selective investment policy''' SUPR is highly selective in the supermarkets it acquires, seeking to assure that its portfolio benefits from long unexpired lease terms with contractual, upward only, rental uplifts. It undertakes a robust process of due diligence to identify acquisition opportunities and screen for sustainability credentials. SUPR’s stores will typically have the following attributes: * sites that are critical to the operations of the operators, * ideally located in large catchment populations with good transport links, * long unexpired leases with inflation-linked rental uplifts,12 * robust underlying trading and strong tenants, * attractive property fundamentals with opportunities for active asset management, and * good sustainability credentials or the potential for improvement through assets management. '''Strong portfolio growth despite selective approach''' SUPR’s direct portfolio has grown very strongly since listing (Exhibit 6). Including post-H122 acquisitions it is externally valued at just over £1.5bn, comprising 41 assets, with annualised passing rent of £77.0m reflected in a net initial yield of 4.7%. At end-H122 the portfolio valuation was £1,413.5m, up £265.1m during the six months, of which acquisitions accounted for £243.4m and valuation growth £21.7m, a 2.0% like-for-like gain. Most rents (88%) are either linked to inflation (85%) or subject to fixed uplifts (3%), with 12% set on an open market basis. Most rents (64%) are reviewed on an annual basis, providing regular uplifts in rental income, with 34% reviewed at five-yearly intervals, and a small number at seven-yearly intervals. The weighted average lease term (WAULT) of the portfolio is 15 years with the longest individual term to expiry 36 years and the shortest six years. SUPR focuses on index-linked longer leases for the income visibility they provide, but shorter leases may provide enhanced returns, blending a higher immediate yield with asset management opportunities to regear (extend) the lease. SUPR will also acquire assets subject to open market rent reviews where the investment case is strong. The portfolio valuation includes £54m of properties with annualised passing of £4.4m in respect of the ancillary assets (typically non-food stores) that have been acquired alongside a small number of the supermarket acquisitions. These ancillary assets are not targeted by SUPR but can provide access to attractive supermarkets, allowing it to maintain full strategic control over sites, while also providing asset management options. A notable example of SUPR using its sector specialist expertise to identify value add opportunities was the September 2021 acquisition of an omnichannel Tesco store in Prescot. Having identified the attractions of this top-quartile trading store, situated in a densely populated catchment area, SUPR had been engaged in off-market discussion for a couple of years. For many potential acquirers the short (four-year) remaining lease term, significant unutilised site area and a high rent to store turnover ratio posed uncertainty over the lease renewal outcome. SUPR was able to de-risk the asset at acquisition, agreeing a new 15-year annual CPI-linked lease with rebased an affordable level (estimated by SUPR at 4% of store turnover), creating material additional value. By acquiring an adjacent site SUPR has created the opportunity to create further online capacity for the store. In February 2022, SUPR completed another value creating lease regear of a strategically important omnichannel store let to Tesco store in Leicester. The open market value lease with eight years remaining was replaced with a new 15-year lease with annual RPI uplifts, with rents also rebased to 4% rent-to turnover. With its growth, the portfolio has become increasingly diversified by store operator as well as by geography, although it continues to be focused on the main operators, Tesco and Sainsbury’s. During H122 SUPR added M&S to its list of tenant operators and in January added Asda. Full details of the portfolio (and the Sainsbury’s Reversion Portfolio) are available on SUPR’s website. '''Recent transactions''' During H122 SUPR acquired eight supermarket assets for an aggregate £243m (before acquisition costs) at an accretive net initial yield of 4.5% and average 16-year WAULT. These comprise: * August 2021: an M&S and Aldi in West Derby, Liverpool, for £10.2m. The M&S store has a 10-year unexpired lease term and five-yearly, upward-only, open market rent reviews. The Aldi store has a 15-year unexpired lease term and five-yearly, upwards only, 2.5% fixed rent reviews compounded annually. * September 2021: an Aldi in Oldham, Manchester, for £5.6m with a 10-year unexpired lease term and five-yearly, upwards-only, 2% fixed rent reviews compounded annually. * September 2021: a Tesco in Prescot, Merseyside, for £50.0m with a 15-year unexpired lease term and annual, upwards-only, CPI-linked rent reviews. * September 2021: a Morrisons in Workington, Cumbria, for £28.9m with a 17-year unexpired lease term and five-yearly, upwards-only, CPI-linked rent reviews. * November 2021: Sainsbury’s in Swansea and Tesco in Maidstone, for £73.0m with a weighted average unexpired lease term of 21 years, both with five-yearly, upward-only, open market rent reviews. * November 2021: Sainsbury’s in Cannock for £75.8m with a 15-year unexpired lease term and five-yearly, upward-only, RPI-linked rent reviews. Included in the acquisitions above were 10 non-food units, which were acquired as part of the site freeholds. These were valued at £13.9m as at 31 December 2021 and consist of a mix of non-food retail and consumer services. Since H122 SUPR has acquired a further three supermarkets with a weighted average net initial yield of 4.8% and weighted average unexpired lease term of 19 years for a total consideration of £128.3m (before acquisition costs). These comprise: * January 2022: Sainsbury’s in Washington and Asda in Cwmbran for £55.1m with a weighted average unexpired lease term of 21 years. The Sainsbury’s has seven-yearly, upward-only, RPI-linked rent reviews and the Asda has five-yearly, upwards-only, open market rent reviews. * January 2022: Tesco in Sheffield for £73.2m with 17 years unexpired lease term and annual, upward-only, RPI-linked rent reviews. Included in the acquisitions above were two non-food, quick service restaurant units for a combined £2.5m (before acquisition costs).
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