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Supermarket Income REIT
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== Financials == Our forecasts are updated for the H122 results and further progress with capital deployment. There is no change to our DPS expectations for the FY22–25 period, representing an annualised growth rate of 2.6% pa, and we expect these to be fully covered despite a reduction in our EPRA earnings and EPRA EPS forecasts. The earnings reduction is primarily driven by increased net interest costs in respect of the unhedged portion of floating rate debt (see below) but also by higher forecast administrative expenses. Key forecasting assumptions In addition to the H122 acquisition of six assets for an aggregate c £243m and the subsequently announced acquisitions of four assets for an aggregate c £128m, we assume the following further acquisition investment, all at a 4.5% net initial yield: * With the equity proceeds of October’s £200m (gross) equity raise fully deployed, a further £22m (before costs) by end-FY22 funded by debt. * £300m (before costs) during early FY24, reinvesting c £183m of cash distributions from the JV on a geared basis. Our other key assumptions include: * Rent uplifts of c £1.0m in H222 (a blended average 4.4% pa uplift on reviews in the period and an annualised increase of c 2.7% on the end-H122 portfolio passing rent), 3.0% in FY23 and 2.5% pa thereafter. This is likely to prove a conservative assumption, but it allows for a smaller uplift from the c 12% of rents that are reviewed on an open-market basis. * JV recurring (non-cash) earnings until the middle of 2023 and no further valuation uplifts, although this may prove conservative, particularly in respect of ongoing negotiations with respect to the five stores where Sainsbury’s has not exercised its purchase option. * Investment adviser fees in line with the agreed schedule, at marginal rate of 0.65% pa on net assets of more than £1,000m. We expect a further step-up in other administrative expenses to reflect the increased size of the business but then to increase broadly in line with inflation. * Finance expense follows the increase in borrowing with a pick-up in the average cost of borrowing to c 2.5%. * For the wholly owned portfolio, we assume valuation growth in line with rental growth. For clarity, we have not assumed gains from further yield compression, although the prospects for this are favourable.
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