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The Supermarket Income REIT (SUPR): isle of calm in choppy seas


We’re going to see a lot of discussion about food prices and the shares of UK supermarkets over the rest of the summer. Investors may be wondering whether to buy into this story through exposure to supermarket stocks, but do you buy a struggling incumbent like Tesco or a new challenger? Alternatively, there is the Supermarket Income REIT (LSE:SUPR).

The London-listed, FTSE 250 real estate investment trust recently spent £51m snapping up a portfolio of Sainsbury’s stores as part of a joint venture with the British Airways pension fund, which it believes can deliver an annual return of more than 10%. The £514m REIT invests in a portfolio of supermarkets let to the country’s biggest grocery names, and has bucked the slump in commercial property thanks to increased reliance on supermarkets during the Covid-19 lockdown.

Solid investment premise based on supermarkets

While most property trusts are still trying to recover from large falls in their share prices, SUPR’s shares are up 4.5% in six months (+8% over 12 months), trading at 127p at time of writing, and last month it raised £140m in an oversubscribed share issue.

SUPR bought the 26 Sainsbury’s properties from British Land (LSE:BLND). Under the deal, the REIT and its partner British Airways pension fund, get 25.5% of the freehold properties (Sainsbury’s keeps 49% while insurance giant Aviva is in for 25.5%).

The Supermarket Income REIT is all about what it calls ‘omnichannel stores’ – larger supermarkets which provide normal, in-store shopping but which also operate as “last mile” online grocery fulfilment centres. These are the guys managing home delivery and click and collect, something which became so important to millions of UK households during lockdown. “We believe these stores not only benefit from conventional in store grocery sales but are also uniquely positioned to benefit from any increase in online grocery sales,” says SUPR.

What is to like about SUPR’s investment approach?

  • Long, inflation-linked leases (portfolio average 15 years)
  • Target dividend per share 5.9p (year ending 30 June 2021) – growing in line with inflation since IPO
  • Majority of stores leased to the big four UK supermarket chains
  • Assets usually in highly populated residential areas
  • Borrowing strategy is targeted at LTV of 30-40% medium term

Interim results for Supermarket Income were released in March. It reported a 60% increase in net rental income and a 6.3% annual rent review increase. Drawn debt was £481m, slightly up on the £413m in June 2021. The running costs for the RET’s secured debt still looks relatively competitive. It is looking at an average running cost of 1.91%.

Is this an inflation-busting investment?

Is this a possible inflation-busting play? We think so. But there is more. The REIT also follows a renewable investment strategy. Supermarket real estate is ideally positioned for the installation of photovoltaic systems to help meet power demand within the markets. The nature of the leases also means you can get long term power purchase agreements over the line. And let’s not forget the large, flat roofs of supermarkets, which are ideal for solar panels.

There’s a lot to like with this REIT. Dividend growth has been consistent. Net rental income is all going in the right direction. And that’s before you factor in the very attractive shareholder return. SUPR certainly looks like a better place than many to hide out in during current market conditions.

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This article does not constitute investment advice. Do your own research or consult a professional advisor.

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