Supermarket Income REIT plc (SUPR) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the Supermarket Income REIT plc investor presentation, and apologies for our short delay. [Operator Instructions] The company may not be in a position to answer every question received during the meeting itself. However, the company review all questions submitted today and publish responses where it is appropriate to do so. Before we begin, we would like to submit the following poll. And if you give that your kind attention, we will be most grateful. And I'd now like to hand over to Chief Investment Officer, Steven Noble. Good afternoon, sir.

Thank you, and good afternoon, everyone. My name is Steven Noble, Chief Investment Officer and Co-Founder of Atrato Capital. Atrato Capital is the investment adviser to Supermarket Income REIT which, of course, is the U.K.'s only real estate investment company focused exclusively on investing in U.K. supermarket property. Before we get into the presentation, I just wanted to introduce some of the key individuals within the team. It gives you a context as to why we set up this real estate investment trust. And I'm joined today by Robert Abraham, who is the Managing Director for Supermarket Income REIT. Key other names on our team is Ben Green. He's Co-Founder and principal of the Atrato Capital, Ben's completed around GBP 5 billion of Supermarket sale and leasebacks that we believe is more than anybody else in the U.K. Steve Windsor, again, he's also a co-founder of Atrato. In his previous role, he was an adviser to Alan Stewart, who was CFO of Tesco's on their store buyback model. And of course, some other names to point out, Vince Prior, he was previously Head of Sainsbury's Property. And of course, Justin King, Justin King joined us as a Senior Adviser, we knew Justin from our previous role. He was, of course, for those of you who don't know him, he was Chief Executive of Sainsbury's for around 10 years and he currently sits on the Board of Marks & Spencer. He loved what we were doing and was keen to join us. Now why introduce those individuals? Well, it explains why we put this team together, what we created was a coverage model for our sector. And we cover our tenants, be it at the Board level, i.e., John Allan, Chairman of Tesco's all the way down to the individual store managers. And that's designed to give us a deep understanding of the sector but also deliver a material information as well as relationship advantage. And hopefully, you're going to see that as we explain our strategy a lot more in the coming pages of this presentation. Just to introduce our investment strategy. There's 3 core pillars to our strategy, which underlies what we really love about this sector. The first of those is lease length and structure. We target leases that provide long unexpired terms with inflation-linked rental uplifts. Our portfolio WAULT is currently 15 years, and this provides a high degree of certainty of income, which grows with inflation, 85% of our portfolio is inflation linked. And Rob will take you through the details of our portfolio a bit later in the presentation. The second pillar to our investment strategy is omnichannel stores, that's future-proofing investments in U.K. supermarkets. Now what do I mean by omnichannel stores? Omnichannel stores are stores that operate as traditional supermarkets, but they also operate as last mile fulfillment hubs for online grocery, and that's both the home delivery as well as Click & Collect. Now as more grocery sales go online, how do we, as real estate investors capture that growth? Well, we do that through our omnichannel investment strategy. And we're going to take you through that in a lot more detail in this presentation. Now on top of that, we're only targeting stores that have very strong trading performance and sit in the upper quartiles of the operator's portfolio. And the third component of our strategy is site size. One of the benefits of investing in this sector is the size of the land that we acquire. On average, our site size is around 10 acres. And the store only covers around 25% of that site. And that's what we love about this sector because that amount of land gives us a lot of optionality to explore asset management opportunities, but also work with our tenants as their operational needs on the sites change. Most recently, we've seen stores requiring additional capacity for online fulfillment. Transitioning car park areas for more Click & Collect, changing the back-of-house operations to support more home delivery our sites are of a size that enables us to agree to our tenants' requirements for changing how they operate on our sites. Just summarizing our portfolio. Currently stands at GBP 1.7 billion of assets under management. That generates an average yield of 4.7%. And again, our average lease length is 15 years. We have 67 stores in our portfolio. And again, 85% of our rental income is linked to inflation. We're listed on the premium segment of the U.K. Stock Exchange, and we are part of the EPRA U.K. NAREIT index. Now taking all of these factors together, you can see how we build a strategy of acquiring high-quality supermarkets. And this page illustrates how our acquisition and our growth is delivering persistently higher returns for shareholders. The chart top left shows the growth in our rental income over the last 5 years as we've built our supermarket portfolio. And top right, you can see that, that enables us to deliver strong dividend growth. Bottom left, you can see that our aggregate growth from acquisitions is still coming at the same time as growing NTA. Our NTA now stands at 113p from our last issued results. And finally, bottom right, you can see how we've consistently delivered on our target level of shareholder returns with our cumulative return since our IPO at just under 50%. I'm now going to hand you over to Rob, who's going to take you through the grocery market in a bit more detail, before we take you into more detail on our investment strategy.

Steven, it's Mark. Just so you know, that alarm that you heard was a fire alarm in the office and Rob has had to evacuate the building. So unfortunately, that was what the noise was that came across. He's just sent me a message to say that. So apologies if I could just ask you to progress. He doesn't think that he's be back in for the rest of the presentation, but I'll notify you as when he does.

Okay. An easy get out for Rob. So I'm going to take you through the U.K. grocery market in a bit more detail. So there's 3 components, which we believe structurally supports our investment strategy that is currently playing out in the U.K. grocery market. The first of those is working from home. We've seen an increased level of working from home since the pandemic, which is now continuing. The second factor is around digital transition. We've seen more and more grocery go online and the fulfillment strategy is vital to understanding our investment strategy and our investment focus in our omnichannel stores. And the third is inflation. U.K. grocery has always been a strong inflationary hedge as the U.K. grocers have been able to pass through inflationary cost pressure enterprises. And these are the 3 core tailwinds that are currently playing out in the grocery sector, which is aligned to our investment strategy. And I'll take you through each 1 of those now in a bit more detail. Working from home. As I said, we've seen a significant increase in the level of working from home. On the graph here on the left-hand side, you can see that, that's a 350% increase in working from home since 2019. Now that additional level of working from home means spend on lunchtime and other products, which would traditionally have gone into the likes of Pret and Eats, et cetera, have transitioned into the supermarkets and that's generated a 10% increase in supermarket sales growth. The second of these factors is the digital transition in grocery. There's been a step change in online grocery. It's grown by 88%. If we look at it on a 2-year basis, which effectively smooths out a lot of the noise that we've seen during the pandemic, but that's a phenomenal increase in online grocery. Now the important factor to remember is how is that online grocery demand fulfilled and 80% of all of U.K. online grocery is fulfilled from stores, what are now known as omnichannel stores. If we eliminate Ocado and Ocado's market share in U.K. online grocery, that number increases to over 90%. And we're going to explain why the operators use stores to fulfill online grocery in a bit more detail shortly. And of course, 1 of the fastest-growing segments of online grocery is click & collect. It's far more efficient at certain times for customers to do the delivery bit themselves by going to the store and collect their online ordered groceries, that's the fastest-growing segment and real estate plays a critical role in click & collect services. And of course, -- this explains why we focus in on omnichannel stores. If we look at the sales growth in omnichannel stores, which are benefiting through increased physical sales as well as online sales, that segment of the market is growing at around 16%. Now if we compare that to non-omnichannel stores, just traditional supermarkets, that growth is around 4%. And that graph or illustration on the left explains why we're focused in on omnichannel stores. That's the segment of the market that we're targeting because that's the segment that has the highest level of growth. And right now, the property market is not differentiating the value on omnichannel stores relative to non-omnichannel stores. Now why does supermarkets use omnichannel stores to fulfill online grocery? What proximity to customer is key for lower fulfillment costs? The map here on the left is Tesco's online distribution network, those blue dots across the U.K. there, their stores or omnichannel stores that they use to support online grocery through both home delivery and click & collect and the red dots you see there are their online only fulfillment centers. And you can see they're clustered in and around London because London is 1 of the poorest served places for supermarkets because space is so expensive. And on the right-hand side, you can see the economics. That explains why they use those blue dots. I mean, Tesco's blue dots, you can see there, that gives them 90% coverage across the U.K. within less than an hour's delivery time. And when we look at the economics of online fulfillment and if we compare a centralized fulfillment model, such as the 1 that is used by Ocado using centralized distribution sheds to distribute online grocery. Actually, their fulfillment center is just so far away from their customer, that the distance they have to travel to get to their first customer run and then get back again means that their KPI on deliveries, which is measured as delivery drops per hour is around 2. So a van can do around 2 delivery drops per hour. And then if we compare that to omnichannel stores, i.e., those blue dots we've illustrated there because they're closer to their customer they can actually achieve a greater level of delivery density across our portfolio and across the U.K., we think that's around 4 drops per hour at the moment. Again, shorter journey times to your customers means you can enhance those delivery densities. And the impact on cost is phenomenal. And you can see it there, with centralized fulfillment, and taking into account that, on average, a man and van cost is around just under GBP 20 per hour, their cost of their delivery is much higher because they're amortizing that cost over to deliveries, whereas for omnichannel stores, where you're amortizing that cost over 4 drops per hour, it obviously reduces that cost considerably. And right now, the average cost of fulfillment is around GBP 8. And again, supermarkets were saying to us for a long time that, look, pick and packing is a small component part of the overall costs. And there's a lot of investment in technology and automation around the pick and pack operation. But in reality, the largest cost of online grocery is in the delivery. And you can only reduce that cost through proximity to your customers. And hence, that's the reason why over 90% of the big 4s online groceries is fulfilled using stores, omnichannel stores. And for us, that's the segment of the supermarket property space that we're targeting. And the third of the key tailwinds behind our investment strategy is inflation. Now grocery has always been -- or grocery prices have always been strongly correlated to inflation. In this graph here, the blue columns, you can see is grocery market index growth. And then the gold line, which is RPI. And you can see that level of correlation has been around over 90%. Grocery is a good source of inflation protection. And across on the right-hand side here, you can see some of the most recent announcements in this space, from Cantor, Barclays, even Tesco and Morrisons who are making it clear that they do need to pass through their price pressure through to prices, which for us means that as grocery prices elevate will our rents remain affordable because, of course, 85% of our rents in our portfolio are currently correlated to inflation. Turning to our market. This gold line here is the yield series that we produced a lot of supermarket indices are not reflective of our space, i.e., omnichannel supermarkets and long leases. So, we created this yield series. It comprises of all transactions on supermarkets with leases in excess of 10 years. So this is reflective of our investment market. And you can see since we launched this concept back in 2016, supermarket yields have compressed. And they're currently finding their clearing level at around 4.4%. Now in comparison, our portfolio valuation yield, which is currently around 4.7% on average looks conservatively valued relative to where the market is currently finding its clearing level. And that makes sense because values tend to look retrospectively rather than prospectively when setting values. If our valuation yields ever get to that kind of 4.4% area, we think that's about 12 to 13p on that. Now supermarket yield still offer considerable relative value. If we look, for example, at where Tesco's corporate bonds and where Sainsbury's corporate bonds are trading, supermarket yields offer considerable relative value. And don't forget, it's not at just the passing yield, we also benefit through the inflation growth. So if we looked at our yield to maturity equivalent or the IRR on our store investments, our returns are closer to 6% to 8% over their life. So therefore, property yields still offer considerable relative value to corporate bonds. And hence, we think there's further yield compression to come in this sector. And it's not only compared to our tenants' corporate bonds, but even if we look at other comparable property sectors, i.e., for example, distribution assets, will supermarkets still offer relative value? On the distribution side, we're seeing transactions readily trade now in and around the 4% level. And of course, turning back to inflation, even ignoring the long-term inflation linkage in our portfolio, supermarket yields that do benefit from inflation-linked uplifts on their rents still offer considerable relative value to say index-linked gilts, that's a 6 and over 6% yield advantage to corporate or index-linked gilts that trade in the market. Again, this is why we believe there's further yield compression to come in this sector.

Steven, I am back online, you'll be pleased to know. So if you want me to take the portfolio, I can do that.

Please do. Welcome back, Rob.

Apologies, everyone. We had a fire evacuation, but I'm back. So just to take you through. So Super's portfolio is world [indiscernible] on the left there, consists of 41 supermarkets, and we've enhanced the portfolio recently through the additions of a couple of new tenants to the portfolio, that's M&S Foodhall up in Liverpool and also our first Asda down in South Wales in Cwmbran, that still is a particularly strong trade and does more than double of the turnover of any of the competing stores in the town and as this recently invested in an extension there to perform home delivery to a local neighborhood. So it ticks all the boxes for us in those respects. You can also see there in the top right, the portfolio benefits from a long 15-year WAULT weighted towards that bracket of in excess of 10 years. Those leases that are in the shortest bucket there are actually our nonfood exposure, which is adjacent to the large-format supermarkets. The shortest of our supermarket leases is still at least 8 years. So the same benefit from a particularly long lease profile. And then finally, in the bottom right there, you can just see the weighting towards the leading and largest grocery players in the U.K. market, particularly Tesco and Sainsbury's, that's no real surprise. They had the most extensive sale and leaseback programs historically in the early 2000s and 2010s. And that means it's just naturally a greater supply of stock and we target the very best-performing stores, so we have a natural weighting towards Tesco and Sainsbury's. So the group is also well placed in the inflationary environment. 85% of our leases directly benefit from inflation uplifts. And as market rents are a function of turnover, the benchmark for operators being 4% of store turnover or effectively 2 weeks trade per year. That means the inflation uplifts in our leases are sustainable as we're seeing revenues and rents grow in parallel ensuring that rents remain affordable for the operators. And of course, the growing rents also drive NTA growth through increased values. Of the leases that are linked to inflation, there's an average cap of 4%, while 64% benefit from annual reviews and that provides regular rental growth. And then also due to the way uplifts are calculated, we get good visibility throughout the year over our uplifts with a weighting towards the annual reviews, of course, on an annual basis. So to help bring things to life, we also like to give you a bit of detail at the asset level. You may have heard us talk recently about this example in Tesco -- or Tesco in Prescot, this one ticks all the boxes for us. It's a top quartile training store for Tesco in a densely populated catchment with 14 home delivery vans. But there's a particular value opportunity here compared to your standard purchase, 4 years unexpired on the lease and it is oversized, it's about 140,000 square foot relative to the annual sales, and it was also overrented. So actually, for our standard purchase, there was a significant amount of risk we were able to derisk this acquisition through our unique position with our relationship with Tesco. We were able to negotiate a new 15-year lease with annual CPI uplifts that was negotiated whilst we were doing our due diligence on the asset in parallel. So we were able to complete that new lease on the day of completion of the acquisition. The rent was rebased. So the starting rent was 4% of turnover. That was the benchmark I just mentioned. And then we also acquired the opportunity for some further online capacity through an additional plot at the rear of the store, which would allow for the expansion of Tesco's service yard in the future, if required. So then just turning to another example, and this is another off-market transaction and has driven significant value for our shareholders. It's another Tesco. This is up in Leicester. We acquired in November 2020 from British Land Again, it's ticking all of those same boxes. It's a top trader in a densely populated catchment. Again, 15 home delivery vans. And at the point of acquisition, there was 8 years remaining on the lease there. Again, it's oversized. This one is about 160,000 square foot relative to its annual sales. And again, it was over-rented. So actually, that was something we factored in at acquisitions. We acquired an attractive -- a highly attractive 6.3% net initial yield, so the over-rent was priced in. And then turning to today, we've been able to generate GBP 10 million of capital upside for shareholders. That was through a regear to a new 15-year term again, this time to the annual RPI uplifts. Again, the starting rent rebased to 4% of turnover to meeting that affordability benchmark. And this was one that actually, following on from the Prescot regear I just mentioned, Tesco approached us to do this regear. So it was about 6 years remaining on the lease by the time we agreed to regear, but it's just a reflection of these larger stores, there was a perception at one point that the oversized stores that you might see the operators step away from. But actually, we've proven with 2 of these examples that provided the rent is rebased to the right affordable level for the operator, then they're willing to commit long-term to these sites and also introduce inflation in catching the leases. So it's been 2 very strong transactions for us. In the case of Leicester store, as I mentioned, we increased value by GBP 10 million on the food store, and there was also some adjacent nonfood units, which through active asset management, we've been able to drive a further GBP 5 million of valuation upside. So a total gain of GBP 15 million versus a purchase price of around GBP 63 million in just over 18 months. So it's been a very good deal for Super.

And I think it's worth just pausing on that, Rob, because to put that in context, I mean, rebasing to 4% rent turnover, which is a highly affordable rent, especially compared to other asset classes. But the operators are committing to these assets for 15 years and giving inflation-linked rental uplifts for that 15-year duration. I mean, to me, it just illustrates the confidence that they have in these assets and their long-term importance to their operations. And if we put that in context of Tesco's and Sainsbury's and results and their cash flow generation and their profit growth, et cetera, you can see that strategy compounding and why they're committing to these assets for the long term. It just shows the cash flow generation and value that's implicit in this asset class. I'll take you through the JV. We do own a joint venture. I'll just explain the joint venture, and then we can take you through some of the returns. I mean, the easiest way to explain the joint venture is that we acquired a portfolio -- an interest in a portfolio of 26 Sainsbury's stores, which roughly had 2 years remaining on their leases. So those stores were highly reversionary. Now our conviction at the time of the acquisition, that Sainsbury's run on in these stores for the long term. That's exactly what's happened and Sainsbury's have now exercised purchase options to buy back 21 of those stores, and that will be positive to the NTA of Super. I'll quickly take you through the detail before going into the financial returns. So the structure, it's 26 Sainsbury's stores. These are high-quality supermarkets, some of their top trading stores and we have a 25% interest in that structure. We paid GBP 108 million for that interest and it's currently generating a running return of around 11% per annum for us. Now this year, Sainsbury's announced their intention to buy back 21 of the 26 stores that acquisition is due to complete around mid- to late 2023, at which time our original investment will then be liquidated. In terms of returns, I mean, this has been a great business for us. Sainsbury's decision to buy back 21 of the stores has increased the investment value of our interest by around GBP 30 million. Now on top of that, I've already taken you through the yield compression that we've seen in the supermarket space because of the relative value. That yield compression has generated an additional GBP 14 million gain from our investment. And of course, we've had the running yield since we've acquired it, which has generated around GBP 16 million. So all in, we acquired the interest for GBP 108 million and has generated GBP 60 million of gain over the -- around 2 years since we've owned this portfolio. Now I think what this illustrates is just how undervalued U.K. supermarket property has been in the investment market. And I think it also illustrates alongside the 2 other examples that Rob took you through of Tesco's of just how important these assets are to the operators and Sainsbury's decision here to buy back 21 of these stores just proves how valuable these assets are to a, their business model; and b, how much value they generate over time. Finally, ESG. I mean, another factor of why we love investing in this sector and our focus in this sector is the ambition of our tenants to become carbon neutral in their business operations. All our tenants have net 0 target dates, and this has now been extended to become net 0 on their Scope 3 emissions, i.e., decarbonizing their entire business supply chains. And you can see our current EPC portfolio on the left, it's a continuously improving picture. I mean, for example, there were 9 properties, which held an EPC rating of D or E last year. And this compares to around 14 properties in the year previous. So you can see the progressive improvement that's coming through as our tenants and increasingly our ambition is to improve the energy efficiency of the assets as they move towards their overall net 0 target. Now ESG is an area we should score high as an investment institution, and we're doing more in this space. We've recently hired a new Head of Sustainability, Christoph Scaife, who has considerable experience in this space. And he's joined us to assist us in more mainstream reporting and potentially reporting on more mainstream indices, such as the MSCI, Sustainalytics, et cetera, all designed to make your job a lot easier and measuring our progress towards increasing the environmental sustainability of the buildings in which we invest within. And that's it. We can pause now for questions.

That's great. Robert, Steven. Thank you very much indeed for updating investors this afternoon. [Operator Instructions] That's why Robert and Steven, take a few moments to review those questions submitted already. I'd like to remind you the recording of this presentation, along with a copy of the slides and the published Q&A can be accessed via your Investor Meet company dashboard. Robert, Steven, as you can see, you received quite a few questions throughout today's presentation, good to have you back Robert as well. Perhaps if I could just hand back to you guys just to read out the questions and where appropriate, give a response. And then I'll pick up from you at the end if I may.

No problem. I will act as compare, Rob, I think we'll take the first question from Tim R, I see here. Given the high level of linkage between your leases and U.K. inflation and your high level of visibility on future revenues. And in the context of everyday inflation being experienced by your shareholders, can you give us any guidance as to how you might be looking to increase your dividend in the next financial year? Yes, Tim, I can probably take that one. In terms of the dividend policy, it is a progressive dividend policy, and it's linked to the underlying growth in our rental income year-on-year. Rob, do you want to just summarize again our inflation linkage and how that looks on our portfolio?

Yes. Sure. So as we mentioned, 85% of leases are linked to inflation, of those 64% review annually and the remainder almost entirely 5 yearly review. So it does mean some of those reviews are slightly lumpy. And of course, we're constantly growing the portfolio and adding additional leases to that, but that gives you an idea of the -- how those reviews flow through and in the first half or certainly over the year, our average cap is 4%. So it's a broadly -- given inflation is running higher than our caps. Even at the start of the year, it was below the caps in some cases. But yes, that, I think, gives you an idea of where our kind of rental income is moving year-on-year.

And the interesting thing about the cap levels is that grocery inflation overall is now exceeding the cap on rents. So in that respect, we're seeing this compounding effect of under-rentedness now within stores because sales growth on a nominal basis is actually growing at a rate, which is greater than rental growth on rent because of the imposition of caps. So in that respect, rents will remain highly affordable for tenants. Across our portfolio, our average rent turnover is just under 4%. And as Rob took you through on those examples previously, that's the kind of sweet spot for affordability. So in short, we believe our own portfolio is roughly rack rented now. We'll take a next question from Mark B, the given yield compression affecting acquisition opportunities, do you expect your portfolio yield to fall as you deploy recently raised funds? I mean, that's a good question, Mark. Yes, we are seeing kind of transaction levels find their clearing rate at around 4.4%. For info, our breakeven yield of our last raise and off the last raise price was around 4.3%, 4.25%. That's where we'd need to breakeven to maintain our current dividend rate. So in that respect, our cost of capital remains highly competitive. But of course, 1 of our KPIs, we'd like to monitor ourselves against. It's just the average deployment rate. And of course, we don't want to hit our breakeven. We want to exceed it, and to in that respect. Rob, in terms of average yield on the pipeline, I mean it's well above the kind of breakeven, right?

Yes. I mean those of you who saw our presentations during the raise period will know that our near-term pipeline was actually more like 5% on a year basis. There was some -- an element of nonfood in there, which is complementary to the supermarket. It's still very much weighted to the supermarkets around 75%, 80% of exposure, but the benefit is that you're able to achieve a slightly wider yield on those. So on a blended yield basis look very attractive for us. And as Steven mentioned, that means our deployments are constantly accretive. And I think that one of the parts to the question is relating to our own portfolio. And I think it's fair to say we do think that our portfolio is quite conservatively valued at the moment and so we'd like to believe that there's an opportunity for further growth there. Steven has taken you through the yields at that 4.4% clearing level. And with our portfolio valued at 4.7%, it certainly feels like on our stand-alone food stores, there's some way to go on those yields.

Great question for Mark B on IFRS 16 for the technical people who are accountants on the. IFRS 16 reduced the propensity of operators to lease versus buying them outright. I mean, this is a great question, Mark. For those who aren't accountants, I mean, leases are now on balance sheet as liabilities. Previously, they were all off balance sheet. So -- has that changed operators view? Yes, absolutely. Leases are just expensive debt now. I mean, you saw on that yield graph, the difference between their bonds and the supermarket yields. So in that respect, it makes more sense for them to buy their stores back and bear it in mind, they can raise debt at around 3% and they can buy back their stores that have a lifetime IRR in our view of between 6% and 8%. So that makes absolute sense. And of course, Steve Windsor, who I introduced at the start of this presentation, wrote the buyback model for Tesco's made this clear that the change in accounting standards is meant that it was better for them to buy back stores and just own them. And that's a feature of our investment market. That's what makes this unique is that for U.K. supermarket there's a net contraction of investable supply in the market because the operators are buying them back. Tesco's in around the last 6 years have bought back around GBP 1 billion of their own stores. I took you through Sainsbury's and they're buying back 21 stores. We think that's around roughly over GBP 1 billion of purchase commitment from NIM. So in that respect, our investment market is declining. We're still seeing a lot of supply. We can still deploy capital. We're still seeing some really attractive high-quality supermarkets come to market from institutional sellers who have a variety of reasons, 1 of them being driven by their need for liquidity. However, the overall market is declining in size. And I think that's another factor as to why we feel there's further yield compression to come and why there's so much implied value in this asset class because the nature of the decline in supply will actually mean that the value of this asset class has further to go in terms of increasing. I'll turn to another quick question that came in on our premium listing. I'm just pulling it out project if I get this perfect, but from Alan talking about the impact on share price from our premium listing. For those who didn't know, we were previously on the specialist fund segment of the U.K. Stock Exchange. But given the portfolio growth and the diversification, we're now a premium listed stock. We are now included in the EPRA NAREIT Index as well as the FTSE 250 Index. We have seen some share price growth because the index followers need to buy our shares as they rebalance their portfolios to reflect the index. I think the question was around, do we expect more to come? It's hard to say. I can't give you forecast on share price, I'm afraid. But look, the overall benefit to shareholders of becoming a premium listed stock and becoming index included was around liquidity and effectively having a greater pool of buyers in our stocks that follow that index. So we would expect that liquidity benefit to continually compound through in terms of overall growth going forward. Just quickly running through question from Alessandro on the current dividend cover situation, and is there an upper and lower cover level that the fund is happy to operate within. Rob, do you want to take that one?

Yes. I think on dividend cover, we're currently over 100% covered. Of course, we've recently raised that in deploying that in an accretive manner will allow us to continue to do that. Of course, we are targeting, always being in excess of 100% covered, and then we are able to pass through our rental income growth in the form of dividend uplift as that comes through. So you expect them to move in parallel. But ultimately, that's the level we're targeting. We've always done historically well on deploying in an accretive manner that allows us to maintain that dividend cover on a pro forma look forward basis.

And sticking with Europe, on deployment, quite a few questions coming in on how we're getting on with the last raise and our deployment and when we think this will be spent?

Yes. I mean, we're slightly limited as to what we can say. But I think it's a fair question off the back of the recent equity raise. When we were raising we showed that there was a strong pipeline that's still there. We're in exclusivity on a number of assets that we're executing on at the moment. So we hope to be able to make some announcements in the not-too-distant future as we begin to deploy those proceeds. And I think you can look to our historic performance as to the pace at which we've deployed and we certainly don't expect to be any slower this time around.

A question coming in on the JV. I understand Sainsbury's have exercised an option to buy back many of the supermarkets. When do you expect the sale proceeds to be received and are you confident you can reinvest those proceeds? So in short, yes, we will receive the monetization of those proceeds, which is around GBP 170 million of current valuations, that's mid to late 2023 when the option price will be agreed and the option will be settled with Sainsbury's. When do we expect to invest those? I mean we've got a long run-up to that, Robin. It's a good question. I mean, given that it's a known factor, and we know when that sale needs to complete, we've got quite a long time to assemble a portfolio that we can deploy into and it's one of the features in our investment strategy is that we always like to build a pipeline take that pipeline to the market when we're looking to raise equity capital. That's what we did on our last race. And as Rob said, we're in the process of executing on that pipeline. And I think for this in 2023, we know when those funds will be received. So we do have a long run-up to build a pipeline. Overall, we are still seeing a lot of stock come to market. I mean, last year, we saw about GBP 1.7 billion of U.K. supermarket property exchange hands. We expect maybe slightly less levels into next year. But nevertheless, it's still a liquid market and there's still a lot of factors as to why people are selling primarily institutional funds who are rebasing portfolios out of retail or asset classifications into distribution, life science, et cetera. And it's still bad to us, but it's a reality that those funds still put supermarkets despite their value and despite their inflation benefits and the defensive sector that they operate within that they are still classified as retail, and they are still selling those in order to rebase their portfolios. So to that respect, we net beneficiaries the liquidity that they're introducing. So long way of saying we are highly confident we can redeploy the Sainsbury's proceeds. But of course, we'll assess that at the time next year and it's ultimately to the Board's decision as to what the best use of those funds will be. Quick question, Rob, on the bond offering. For those who don't know us that well, we did get an investment-grade rating from Fitch this year. It was one of our key milestones. We are now rated investment grade by Fitch ratings. Rob, do you want to give a quick update on our debt plans, and we were looking at the bond market, which is quite?

Yes, that BBB+ means that solid investment-grade rating does give us the optionality of longer-dated financing. There has been a bit more volatility in that market given what's going on in the world at the moment. So we've been exploring our options. We do have the ability to execute on bonds. We've also got a very supportive bank group, as you've seen previously, well diversified, international banking group with really good product capability. So we've got options open to us, and we're just exploring those at the moment. I think you shouldn't expect any change in terms of our long-term LTV target range of about 30% to 40%. So any -- depending on what instruments we go for, that will be incremental as we deploy the proceeds of the equity raise or refinancing existing debt, but it's not going to be something that's going to take us beyond -- materially beyond the long-term target LTV range. And then in terms of sizing that will all be dependent on market conditions at the time. But some of you may know that a benchmark sterling bonds so kind of minimum size is roughly GBP 250 million. So that gives you an idea of potential sizing. But yes, we're in a fortunate position that grocery is a well understood sector by financing parties, whether that's in the bond market or the bank market. So we've got good options available to us at the moment.

Last couple of questions before we close out. I can probably blast through these fairly quickly. The first one is just on admissions overall. And I think a comment that the U.K. is a tiny part of world wide emissions. Yes, completely agreed. But look, for us, it's about making these buildings sustainable and helping our tenants get to their overall net 0 target. So it is an important part of our investment strategy. And these assets are perfect for increasing their overall sustainability if you think they're all flat roofs, those flat roofs are perfect for solar. So solar investment is the next key milestone for us and putting those on the rooftops of our buildings such that our tenants can effectively source green decarbonized power for most of their operations. Second one from Michael around expansion into Europe. No plans at the moment, Michael we're seeing GBP 1.7 billion of liquidity in this investment space. We've got plenty to keep us going. For us, it's a knowledge model, relationship model with our tenants. So to that extent, we have those relationships in the U.K. And a question from Alastair, which is quite an interesting one. The yield differential between inflation and supermarkets yields, which are capped. I mean it's a great question, Alastair because a lot of people do say to us, well, your capped, so are you inflation linked. I mean, we benefit inflation in 2 ways. One is through the rent reviews and the additional income we get through your rents, which is obviously capped. And as Rob said, that's average is around 4%. However, the rents are sustainable. Given that 1 of the nice things about having caps there, of course, is that these assets won't become unaffordable for our tenants and especially in the grocery space, whereby they are historically and currently passing through inflation pressure through to their prices, they have to because margins are quite tight. They can't really absorb cost pressures. So in that respect, as I said earlier, we are seeing grocery prices exceed cap levels on supermarkets, which means rents are becoming even more affordable in this high inflation environment, now what does that mean for us? Well, we benefit through a second way, of course, through valuation growth because if market rents are growing with inflation and growing with grocery price inflation and using that 4% rent turnover as a benchmark, then the imposition of the caps means that our assets are actually getting more affordable. So in that respect the value of the real estate from a yield perspective is also increasing. So we get the valuation benefit as well as the income benefit. So we will grow EPS as well as our NTA. So both levels of inflation. And we think that level of growth when you project that into our total shareholder return means that we are looking at levered returns far in excess of inflation growth, which you can kind of see when you look back at our historical shareholder growth on a total shareholder return basis, which has been averaging around 12% since we launched our IPO. So in that respect, yes, we have caps, but we don't think it significantly impairs our total return assumptions. And I think that was broadly everything.

That's great, Steven. Thank you and Robert for taking the questions from our investors. And thank you to the investors that have taken time to submit questions throughout today's meeting. Steven, Robert, I know investor feedback is particularly important to you both, and I'll shortly readout its investors to give you their thoughts and expectations. But before doing so, Steven, I wondered if I may just hand back to you just for a few closing comments, after which I will send investors to give you their feedback.

Yes, absolutely. Look, overall, we have scaled the business, but what we're delighted about is that we are delivering persistent growth for shareholders as we grow and scale that business. Last year, we achieved big strategic milestones for the funds. The first of those was an investment-grade credit rating. And of course, we're now a premium listed stocks. Our investment strategy is, of course, structurally supported by inflation, increases working from home and the shift towards online. And in that respect, we are well positioned for the future. We feel fortunate to be operating in a space, the U.K. grocery market, which has been traditionally countercyclical and very defensive. And as macroeconomic backdrop becomes ever more uncertain, we're unfortunate to be in a sector that we're focused with in.

That's great. Steven, Robert, thank you once again for updating investors this afternoon. Can I please ask investors not to close this session as you'll now be automatically redirected for the opportunity to provide your feedback in order the company can better understand your views and expectations. It will take a few moments to complete, but I'm sure it'll be greatly valued. On behalf of the management team of Supermarket Income REIT plc, we'd like to thank you very much for attending today's presentation. That now concludes today's session. I may wish you a very pleasant afternoon.