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

Good afternoon, and welcome to the Supermarket Income REIT plc Investor Presentation. [Operator Instructions] The company may not be in a position to answer every question received during the meeting itself. However, the company will review all questions submitted today and publish responses where it's appropriate to do so. Before we begin, I'd like to set the following poll. I'd now like to hand you over to Steven Noble, Chief Investment Officer. Good afternoon, sir.

Good afternoon and good afternoon, everybody. Thank you for attending. My name is Steven Noble. I am the Chief Investment Officer for Atrato. Atrato is the investment adviser to Supermarket income REIT. And I'm joined today by Robert -- with Robert Abraham, who is the Managing Director for Supermarket Income REIT. I just wanted to start today by taking you through some of the market fundamentals that we feel that our investment strategy and our investment market is highly attractive. The first of those is that we operate within a highly resilient sector. It's worth reminding that grocery is countercyclical and, of course, is highly protective in an economic downturn or during any periods of economic volatility like we're experiencing right now. The second of our fundamentals is that we view that our market is structurally supported. We're benefiting from 3 core tailwinds to our investment strategy. The first of those is very high inflation, and we're taking more -- I'll take you through in more detail how that impacts our investment strategy and return shortly. The second of those is the increased tendency for working from home and the impact that that's having on sales for our tenants, and the third of those is the online channel shift. Now core to our strategy is our focus on acquisitions of omnichannel stores. And for those who are not familiar with us, omnichannel stores are supermarkets which have a dual role in fulfilling sales in the store as well as fulfilling online sales through both Click and Collect and home delivery. And we have an example of an acquisition we'll take you through shortly, which brings that a lot more to life. Now it's just worth noting that our focus is on our omnichannel stores is because that is the fastest-growing U.K. grocery channel. And the third is around inflation-linked rent reviews. 80% of our rental income is linked to inflation. Just to quickly run through some business highlights. Overall, our portfolio has a long lease life. Our average lease length within our portfolio is 15 years. We see continuing improvement in the environmental performance of our assets. The average EPC rating on our portfolio has increased by 11%. And we're going to take you through a lot more detail on that shortly. During the period, we achieved FTSE 250 and EPRA index inclusion. Our Sainsbury's joint venture monetized during the period -- or sorry, contractually monetized during the period, and that's generated a 1.7x increase in value, and again, I'll take you through that in more detail shortly. And it's worth noting that we took a prudent decision to hedge 100% of our debt exposure. I just thought it's worth outlining before we get into the details of the portfolio and the fund, just the resiliency of this sector. So the first of those is around store essentiality. Supermarkets are core food infrastructure in the U.K. It's worth noting that over 60% of the GBP 215 billion grocery market is fulfilled through a supermarket. And we -- on a very specific subsector of that market being omnichannel stores, which also benefit from online groceries. Now as I mentioned, grocery is nondiscretionary spend, which means for our tenants, sales volatility is very low, and we continue to see a high utilization of the assets even during periods of an economic downturn. The third is around high inflation protection. I mean it's a characteristic of Supermarket leases that you get inflation linked. And as I said earlier, 80% of portfolio rent reviews are index-linked. The fourth is around tenant risk. We have a high concentration to Tesco's and Sainsbury's. 80% of our portfolio. We're naturally concentrated because of our focus purely on U.K. supermarkets. Morrisons and ASDA in the new ownership structure under private equity is always front of our minds, but that's overall a very small part of our portfolio, for exposure to Morrisons and ASDA combined is less than 10%. And the fifth core factor is just the combination of contracted uplifts and long lease terms. I mean these 2 combined mean that we have 15 years of compounded income growth, and that would also translate into compounded capital growth. And I'm going to take you through an example of how our return expectations have also changed in this current economic downturn. It's also worth to note that we are in a period of economic uncertainty, and there's relatively high levels of economic uncertainty at the moment. So our responses to some respects is to batten down the hatches and just shore up our balance sheet. So what have we done in that respect? Well, first of all, we've fixed our debt until 2026, and we've now got 100% hedges on our interest rate. We're relatively unique in that we have GBP 190 million liquidity event coming in mid-2023, and that's because of the hardwired sale of our joint venture interest to Sainsbury's. We've got ample debt headroom on our covenants. We're five covered on interest, and we have a very low LTV, and I'll take you through our debt stack shortly. The third point is the grocery is a safe sector. I mean it is a countercyclical overall industry classification. And again, high inflation-linked uplifts and our long lease terms means that combined, we have a highly resilient portfolio and balance sheet. Let me turn to the debt. Our LTV, as it currently stands, is around 38%. However, with the JV monetizing in mid-2023, the proceeds of that if used to pay down debt will reduce our overall LTV to around 25%. That gives us a very low level of leverage within our [indiscernible]. As I said earlier, we've hedged 100% of our interest rate exposure, and our own hedge rate is currently 2.6%, which means for us, we have close to 0 P&L sensitivity to interest rates. Now in terms of how does our return expectations on this asset class changed given the increase in interest rates and given the increase in inflation that we've seen. So since September, real yields on government bonds or, if you like, the risk-free rate of return in the economy has changed, and that's increased by around 2.5% to 3%. Now that obviously has an impact on other asset returns expectations and inevitably valuation. However, much of that return increase on government bonds is a policy response largely due to the increased levels of inflation within the economy. Now we capitalize on that through the nature of our leases being inflation-linked, and let me give you an example of how that impacts our returns. If we took a very simple scenario example, where we buy an asset at a 4.5% yield and we get absolutely no inflation growth. In gold line, our IRR over the long term, all our assets, which we've illustrated here for a 10-year period would be 4.5%. Now when we launched this fund back in 2017, Inflation expectations long run was around 2%, which when we modeled that through our returns environment, which you see in the gray line, on average, RRR was around 6.5%. Of course, we're in a completely different world now with much higher long-term inflation expectations. And in that dark blue line, we've modeled a 4% inflation, which corresponds to the average cap within our port. Now if that gets here over the whole period for assets, our IRR, which is the average of that blue line, would be around 9.5%. So that's an increase of over 3% to when we launched the fund back in 2017. And that's an illustration of the power and the importance of long-term leases with inflation-linked rent reviews. In that the compounding effect over time is offsetting increase that we're seeing in real yields in the investment market. I'm now going to hand over to Rob, you take you through our portfolio in a bit more detail. Rob?

Thank you, Steven. So good afternoon, everyone. So yes, our portfolio, as you can see on the page here, it's been compiled through more than 40 individual acquisitions that we've got a unique portfolio of top trading stores and as you can see, that benefits from diversification, that's both by geography and tenant. And we've got representation across 8 of the U.K.'s leading and largest grocery operators. 93% of our stores are omnichannel, and they're playing a critical role in the online grocery fulfillment network, as Steven mentioned earlier. There is also for inflation protection with 81% of our rent reviews inflation linked. You can actually find a full breakdown of our portfolio on the Super website. And there, you'll see that our total rent roll today with acquisitions since our last reported numbers in June. Our total rent roll is around 95 million. Our portfolio valuation yield was last reported at 4.6% including those acquisitions after the end of the period, that's all at 4.7%. So just turning to ESG sustainability. So this is something that both Super and its tenants are committed to. You'll see there that during the last year, our EPC scores have improved. There's been 11% improvement in A-C ratings up to 81% now in the A-C range, and there are no E-rated stores. And one of the really attractive aspects of investing in grocery real estate is there are -- tenants invest in the stores, whether they're leasehold or freehold, and that translates into EPC improvements through energy-efficient lighting and refrigeration-type projects, which are rolled out across their entire store networks. And then at Super's level, we've been making progress on carbon. So we've undertaken our first calculation of baseline emissions across all of our sites, and we're continuing to work on our programs to introduce EV charging and rooftop solar to our assets wherever possible. And we also included TCFD line disclosures in the annual report for the first time. And finally, there, you can see in the bottom right, the governance awards. Super received an EPRA Gold Governance Award for the fourth year in a row. And there was also the appointment of a new Non-Executive Director, Frances Davis, to the Board, and she is an experienced nonexec and has been appointed to chair the new ESG Committee.

It's one of the great things with this asset class and the length of our leases and the fact that all our tenants have very ambitious sustainability goals to be net zero, that they invest heavily in these assets, even though they're leasehold because it's an important part of their overall contribution towards their net-zero plan.

So just to take you through a recent acquisition. So this was our last announced acquisition, which you may have seen. So as we mentioned before, we always target top trading omnichannel stores. And this is one of the target assets in our April equity raise. This was in the pipeline then, but it's also a store that we've been tracking since 2017 at the point of IPO. So we were really pleased to be able to get this acquisition over the line. The total price was GBP 84 million, which is a 5.6% net initial yield on the total site and there was a bit of non-grocery in there. But the reason we really like the store, and you can see this in the chart on the right-hand side there, you've got almost 1 million people within a 30-minute drive time of the store. And that just means it's perfect for online fulfillment. So the store acts as an omnichannel hub. It's got 20 home delivery vans. Tesco doesn't have any other large-format stores of this kind of size that's able to undertake that level of online fulfillment, and that means it's a Q1 trader for Tesco. So a GBP 70 million of annual turnover, and this is one of those stores that if it was a stand-alone food store, then you'd absolutely expect Tesco to be buying it back in themselves. And in the bottom right box there, you can see 14-year RPI lease. So this was a store that was regeared last year by the vendor. The day one rent was set to 4% of turnover. So it was a 15-year annual RPI lease. And that 4% rent turnover benchmark is the key affordability level for the operators. So this is just more evidence of that affordability level and the right level for rents. Our portfolio average rent turnover now is actually about 3.8%, 3.9% which has obviously improved through the store turnover growth through COVID, particularly for omnichannel stores that undertake online fulfillment. And of course, we've seen online volumes up dramatically in the last couple of years. So that is all translating to higher revenues from omnichannel stores, and that means that rents become increasingly affordable.

And Rob, I'm going to preempt a question here that's come in, which I thought was quite good. But if it's such a good store, why didn't Tesco buy it back?

Yes, absolutely. And as I say, this is one of those where if the site could be separated efficiently, which is something we've done many times, then you'd absolutely expect Tesco to be buying this back in. But this is one of those sites where it shares with a number of non-grocery units, which were able to pick up pretty conservative valuation yields. And Tesco is not in the business of being a landlord to these types of -- to the adjacent other tenants. So in years gone by, we might have seen Tesco doing that but not anymore. And that means that actually, Tesco can't buy this one back in. But as I say, it's a top trading store for Tesco, and they would absolutely love to own it, but the site is just a bit too complicated to allow for that.

And for me, what this really illustrates is just the size of the commitment from Tesco's to this site. I mean it's relatively unique to get long leases in a retail environment. But Tesco is committing to this asset for the next 14 years, and they're willing to offer RPI-linked leases to the landlord to secure the security of tenure on that side. I think this says a lot in terms of their overall confidence in this asset and just how important omnichannel stores are to their strategy. I'm going to jump ahead, Rob, because I think it's also worth just giving a quick overview on the Tesco store in Leicester. Can I get you to walk through that one if I can just jump through quickly?

Yes, absolutely. So some of you may have seen this example before. And this is a store we bought back in November 2020, I believe. But it's a really good example where we've been able to drive value for our shareholders through our tenant relationships and just that industry insight, which we've got. And so we brought the store with a short lease, and we're very confident of its importance as an omnichannel hub for Tesco. So this has got similar characteristics, I would say, to the example I just spoke to in Beaumont Leys -- in Bradley Stoke. This -- the Leicester store is the Beaumont Leys. And there's a number of adjacent nonfood units alongside as well. And this was a store that when we acquired, there was around 8 years left on the lease. So by the time of the regear in -- earlier this year, there was around 6 years left on the lease. And what we're able to do is extend that lease out to 15 years again and convert the rent to uplift from open market to annual RPI uplifts. And in this case, we were able to deliver gains of over GBP 14 million in less than 2 years at an IRR of 17%. And in the current environment, we expect there might be some more shorter lease opportunities where vendors have uncertainty over that regear outcome, but we've got that insight and the relationships to be able to deliver those transactions.

And it's just another example of the commitment to the asset. It's another 15-year lease from Tesco's, again with RPI-linked rent reviews. It shows you how important these assets are. And it's not just Tesco's. I'll quickly jump to buyers and sellers slide, if I can find it. I mean when we look at who's buying in this space, I think it's notable here that Tescos are the second biggest buyer of their own real estate as well as entering into long leases when those leases are up for regears. And it's also notable that the fourth biggest buyer here is Sainsbury's. Again, it's our conviction that these assets just have very long-term strategic value. And hence, I think you see that when the ultimate insider, the operators are buying their assets back. Rob, I'll hand back to you to take through some of the non-grocery [indiscernible].

Yes. Thank you. So those 2 store examples I've just spoken to have both got non-grocery assets or units alongside the food store. But I guess just to remind you, our strategy has always been to target top trading omnichannel supermarket, and we absolutely continue to do that. But in both of those examples I've just spoken to, they are top trading omnichannel supermarkets, big online hubs of kind of 15 to 20 vans, big catchments around them. But actually, as I say, sometimes it's not easy to separate the supermarket from the non-grocery. There's probably been 7 or 8 examples of times where we've separated the supermarket from the non-grocery. But in some cases, you just can't do that without impairing the value or, for instance, losing control where if your grocery tenant, which is the lion's share of the value, 78%, 80% of the transaction value. If you've sold off the non-grocery and your grocery tenant needs to be able to do something in the car park or reconfigure the service yard, you can't do that without consent of the others. So that's why it sometimes makes sense to retain the ownership within one. But as you can see here on the page, our non-grocery tenants are highly diversified. They're operating in a range of sectors, which typically cater to daily essentials and services. And you can see there on that list, there's no single point exposure in terms of sector or tenant and for these types of tenants, the location adjacent to the supermarket is just highly desirable because it brings a lot of footfall to the site. So a couple of examples you can see on the page here top left, you've got the Waitrose in Winchester. That shares to start with the medical practice. The top right, the Sainsbury's and M&S Food or in Glasgow, they're co-located with a number of tenants, including Costa, McDonald's, Home Bargains and Boots. So all of those trade very well alongside the supermarket. And we've also been investing in hiring asset managers with expertise in this space just to bolster our team to make sure we're maximizing value for shareholders from these sites.

Now we are getting a few questions on cap levels. So I might address that now while we were talking about the Tesco's regears. A couple of those questions have come through. So yes, our cap is on average around 4% of the portfolio. Typically, we see caps at around 4%, 5% annualized or 5-yearly compounded. Now those caps are obviously there to protect the tenants over the long term. But does that mean we're not inflation linked. Well, no for two reasons. One, we look at inflation over the long term. So right now, yes, grocery is much advertised at around 11% to 13%. Over the long term, though, we don't think that's sustainable. I certainly hope it's not sustainable for everyone's wallet. But nevertheless, over the long term, inflation is predicted to be around that kind of 3.5% level. So we do look at it as inflation linked over the long term. If we look at our entire portfolio and how the mix of our overall rent reviews increases on Page 49. If I quickly jump to that. I mean there you can see the makeup of our 81% of the portfolio being inflation-linked. Now we do have an exposure to open market rent reviews. That has increased for those our investors is highly -- is about market rent reviews are effectively uncapped. It will always be a small part of our portfolio. One of the things we like to offer our investors is highly visible rental growth and contractual rental growth and the certainty and the visibility we can get from inflation is more valuable to us than the kind of uncertainty of the open market rent review process. But nevertheless, we have some exposure to it. And I think the second point around high inflation is as Rob illustrated on some of our regears, market rents in this sector or a factor of turnovers. So what we're actually experiencing right now is a level of under-rentedness building within the portfolio because our tenant sales are inflating at a nominal level of between 10%, 13% for inflation. But their rents are growing at 4% on average with the cap. So in that respect, rents are actually becoming more affordable for our tenants. Now it's a long way off until our leases mature, but nevertheless, when we get to maturity and we regear these assets, we'll be able to capture that higher level of growth through the reversion value towards the market rent?

Quickly flick back because next, we're going to turn -- just a quick update to the joint venture. Now I'm aware most of the attendees on this call may know us quite well. But for those of you who don't, I'll give you a quick -- just a quick recap on what that JV is. So -- we -- the joint venture itself is a 26-store portfolio, although stores are leased to Sainsbury's, we acquired a 25% interest in that portfolio and the purchase price was around [ GBP 109 million ]. Now what's happened this year, we and Sainsbury's have finalized the purchase of 21 stores from that portfolio. I'm sorry, that's Sainsbury's purchase of 21 stores from that portfolio. They've also entered into a renewal lease on 4 stores within the portfolio. Now that combined has valued that interest at GBP 190 million. Now that's generated a 24% IRR or a money multiple of 1.7x. So it's been great business for us. It will monetize in mid-2023. At which time we'll get that GBP 190 million in cash. Now as I said earlier, that makes us relatively unique because we've almost forward sold a portfolio of stores. That liquidity, we can use to pay down debt, and we can reduce our leverage to around 25%, which is to do that. Alternatively, we've got GBP 190 million of liquidity to pursue opportunistic acquisitions especially as we see vendors coming to market who may need liquidity. So there could be some good acquisition opportunities for us. So that optionality is available, and we think that somewhat makes us unique. Now there is one store in there, which is due to close. So out of the 26, there's only one that's going to close. That was underwritten at the point of acquisition. And right now, our exposure to that store in terms of value is around GBP 1 million. So it's pretty much all priced in. Again, I think one of the kind of core points just before we leave this is just around the value of this real estate to the operators. It's quite a big conviction for Sainsbury's to acquire back 21 stores in this portfolio. So I'm going to summarize because we've got quite a few questions that we can quickly jump into. But just to recap, overall, we do believe this is a structurally supported sector. Obviously, the -- our focus on omnichannel stores gives us the benefit of the growth in online grocery. And again, we're supported by a number of tailwinds, primarily inflation and increased working from home, which is all increasing sales levels of our tenants. We have a highly contracted inflation linked and rental [indiscernible]. Our balance sheet, we believe, is exceptionally strong. And again, we've hedged all interest rate exposure for the next 4 years on average. And with the liquidity we've got from the JV, we are really well placed to take advantage of any opportunistic transactions that may come our way over the next 3 to 6 months. We always assess individual transactions individually. And of course, it has to meet our investment criteria. We do believe there may be opportunities coming our way to the future. So at that point, I will pause and I can turn to questions, if that's okay, with the broadcasting team.

Steven, Robert, thank you very much for your presentation. Ladies and gentlemen, please do continue to leave your questions just using the Q&A tab situated in the right-hand corner of your screen. But just allow the company to take a few minutes to review those questions submitted today. 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 Investor dashboard. Steven and Robert, as you can see, we received a number of questions at today's presentation. And if I could just ask you to read out those questions and give responses where it's appropriate to do so. I'll pick up from you both at the end.

Thanks. I'll act as host on the questions. And the first one, I'll hand over to Rob. It's a good question from James M. Why is the debt maturity only 4 years versus 15-year lease terms?

Yes. Yes, good question. So this is something we've obviously been working on for some time. You might have seen that we obtained a credit rating at the start of this year. That was BBB+ from Fitch, an investment-grade credit rating. And we, to date, been financed through a series of secured bank lending facilities. The -- I guess the purpose of getting a credit rating that BBB+ is to open up longer-dated debt financing opportunities and also unsecured financing, which gives you just a huge amount more flexibility in its approach to finance thing. So that was done earlier this year. We were able to transition around 50% of our debt stack is now unsecured. And you can see there the longest term to expiry including the extension options on that is around 7 years on the unsecured RCF. But some of those maturities have been ticking down. We've got a really supportive, diverse banking group, but we did have some plans to go to longer-dated public bond markets. Clearly, the volatility that's taken place this year has just meant that, that market just doesn't look attractive at the moment. So we definitely have kind of considering all options for the future still. And longer term, we would like to more closely match those lease terms, but we do achieve some very attractive pricing on the shorter-dated debt and we do benefit from a lot of liquidity for the sector. So there's kind of no concerns on our part from our banking relationships, it's just we didn't manage to get a bond done before the market's kind of changed.

I'm going to tackle three questions in one because they're all related to the same thing, and it seems like quite a popular question around yields, I'm going to quickly turn to a graph. But so those questions just to summarize. I think it's kind of where do we expect Supermarket yields to go? Where are we seeing Supermarket yields right now? What impact do we think that may have on our NTA. I'm not sure we can give forward guidance, but we can talk about our share price. And also another question around transaction yields, which is similar. I'll let you answer that, Rob, and I'll quickly flip to our index series.

Yes. So that's a key point for us really is the resilience of Supermarket yields and what you're seeing is kind of through COVID was the dramatic compression in yields in other sectors. So on this slide here, you can see logistics came all the way into 2%. And if you look at that kind of peak to trough there from a north of 8% back in 2009 down to 3%, you can see that dramatic yield shift, particularly as we came through COVID logistics where supermarkets by comparison are just so much more stable and resilient. They came into on average, 4.7% in this data which is from MSCI. But you can see that relative stability, you always see in and around the kind of 5% level. But actually, we've seen other sectors compress more aggressively, and that's why we're starting to see logistics unwind reasonably aggressively. I saw a question mentioned warehouse REITs out today with their valuation and then at declines, which are reasonably material, even just as at September. And so you might expect some more to come there as they unwind back out to those long-term averages whereas supermarkets just have always kind of remained in around that 5%. So we don't think supermarkets will be immune to those kind of yield shifts. It's just the kind of relative stability, the unwind will be, I guess, a lot more modest we would expect than the other sectors.

And the way I always like to look at this is -- let's go back to the last period of significant economic volatility for a guide. Okay. These are very different crisis. The one we're facing right now is higher inflation, whereas in the global financial crisis, which was the last big one, it was more of a liquidity issue. But if we look as a comparable, I mean the gold line here at Supermarket yields all the way back to 2004. And in the GFC, Supermarket yields gapped out lower than any other asset class. And they also recovered a lot quicker. Now when you think about the fundamentals, long income, 15-year leases on average, together with inflation-linked growth, the types of tenants that you get with Supermarket leases kind of explains why there's such a strong institutional asset class fundamental behind supermarkets. And when we look now and look back on our IRR returns that we're currently modeling with the higher inflation, even with the imposition of our cap, we're getting back to unlevered IRRs of 9.5%. Again, that is very different to other asset classes. For example, call it, regional park or other kind of short lease opportunities in offices, et cetera. This is relatively completely different. And that long income profile should provide a fairly strong underpin to keeping yields at a sensible level. But we don't believe we're going to be immune. Markets do move in the short term. And in that respect, if you look at our current share price, Rob, I think we're about 104. That's almost implying a kind of 5% yield on our asset base right now. Quickly drift off yields, so there's some more questions coming in around the impact of NAV. Unfortunately, I can't give forward-looking statements. But I would again just point to the kind of market valuation implied at the moment to answer some of the questions. We want to get some questions on sustainability, which is quite interesting. So around rooftop solar, the opportunity for rooftop solar for us, car charging, is that going to be a big part of the overall supermarkets, car parks, et cetera. I mean I'll attempt to flip back to a picture of a supermarket correctly to explain it. But yes, rooftop solar is a huge opportunity for the sector in terms of its overall ESG fundamentals. I mean, roughly speaking, if we were to take a rooftop and here's an illustration. If we were to keep that rooftop out with full solar, we should, on average, be able to supply anywhere between 40% to 50% of the store's electricity needs over a full year basis. So that will have a material reduction in the overall carbon footprint of the store. So it is an opportunity for us, relatively small capital expenditure, typically on the site, it may be around GBP 0.5 million but the beauty is it's private wire, which means we don't need to incur any kind of exposure to the grid. We can just sell every single bit of electricity that's generated back to the tenant and that will be for a contract term roughly around the same term as the lease. So for us, the opportunity is more around the ESG enhancement rather than the economic returns, given it's a relatively small investment per store. So we're currently working with a number of providers around just exploiting that opportunity across all of our estate. There's a big prize to go after. It does get quite complicated, it is time consuming. We would have loved to have done it a lot quicker. But nevertheless, we do have an ambitious program covers all of our estate and that's something we are in the process of rolling out with our tenants. In terms of the car parking and EV charging, yes, there's a huge opportunity there. To dwell time that, that will create at the store is obviously highly attractive to our tenants. Why is there not a situation where every car park has a fast charger right now. I mean, to be brutally honest, it's the grid infrastructure. I can't cope with it. I did get a statistic, which I can't remember what it was. But the last time we were talking to Sainsbury's, they were explaining to us the kind of electricity equivalent of their current petrol station sales and it's a big number. And right now, the infrastructure wouldn't be there to supply that in terms of electricity. In time, part of their plan and engagement with the grid is to upgrade the infrastructure to be able to do it as well as exploiting other solar opportunities such as carport solar, where, for example, you put solar panels over the car parking area. So all of these options are available to enhance sustainability. It's an exciting space, but it will take a while to roll that out. Just quickly, there's a question about -- I'm just going through that, the JV liquidity and the choice between lowering LTD to 25% and opportunistic acquisitions. That's a good question coming in from Paul G. I guess, Rob, do you want to give a bit of color on how we think about that?

Yes. The point for us really is that balance sheet flexibility. So we have got the option in March of repaying debt, as you pointed out, that would take the LTV down to around 25%, 26%. But actually, at the same time, there are potentially some opportunities for us that we'll consider on a case-by-case basis. I guess as we approach March, we've also got GBP 170 million of debt capacity and we are off a relatively low LTV at the moment. So there's a lot of options on the table for us, we're kind of not discounting anything at the moment. It will just be a case of what is the most accretive way to deploy that capital for shareholders when we do, as we approach the receipt of those proceeds in March and July next year, but all options, I guess, are on the table at the moment.

May we get another question about the JV. And with that maturing. What will that do to dividend cover? Apologies, I can't say the name, whoever issued that question. But that's a good question. I mean, again, unfortunately, I'll get into trouble with any kind of forecasts that's coming in from Paul G. We do publish an analyst consensus on our website. And look, given that we've hedged our exposure to interest rate and our average hedge rate is around -- you got 2.6%, 2.8% is kind of the spread. We -- yes, if you view the consensus and some of the analysts that follow us, we're pretty much, they're forecasting us in around the kind of 95% to 105% dividend cover, and we wouldn't disagree with that given we've hedged our exposure to interest rate risk. That was also a similar question coming from Dave M. Thank you for sending that. A question from K.T. around increasing dividends with inflation. Rob, do you want to take that one?

Yes. So I think you have seen our last announcement that are our increase in dividend was 1%. That was driven in part by -- we had like-for-like rental growth of 3.7%, but there was through our asset management in the Beaumont Leys side, which as we showed you, was a highly returned accretive transaction, but there was a rent reduction, which we had factored in at the point of acquisition. So that meant that the kind of pass-through of rental growth was 1%. If taken count that regear was about 1.7% and the position in the Board just in the current environment with the to be on the more conservative side of that. Again, not something we can kind of give forward guidance on. But of course, we have increased our dividend every year since IPO. And I think the Board will be looking to kind of continue that progressive policy.

Some quick questions coming in. Average rent across our portfolio. Square foot.

Yes, that's around GBP 25. It's GBP 25 a square foot on the Supermarkets portfolio. That, as we mentioned earlier, is a rent to turnover around 3.8%, 3.9%. So is inside that affordability benchmark for our operators. And as we say, we're currently seeing store turnovers grow in line with inflation, current growth. Latest grocery inflation is up at around 14%, 15%. The average cap in our inflation-linked leases is at 4%. So we're seeing those store turnovers grow ahead of rents and therefore, rents are becoming increasingly affordable and a smaller proportion of the operator's expenses, which is, of course, positive.

And I'll take the last two questions before you will let you go. Paul G., second part of his question around if we paid down debt with the JV process, wouldn't we be overhedged? Yes, you're right, Paul. But in that scenario, we could collapse those hedges. They're obviously in the money since we struck those hedge rates. So it wouldn't be an economic cost, if that makes sense, you'll just get the mark-to-market those swaps if we decided to collapse them. And a question about the LXi deal and Sainsbury's, yes, there was a much advertised deal. I mean it's a shame for LXi. Are those stores still available for us to buy? That's a decision for Sainsbury's, I think we assess each store individually. We tend to like to hand-pick assets rather than do large portfolio deals. We're quite selective in the types of stuff that we buy, including omnichannel. So if that portfolio came back to the market, we may well look at it. But right now, we understand that, that portfolio has been withdrawn. And a question about raising any capital. Unfortunately, we couldn't possibly -- we can't comment on future capital raises. So in that respect, I think we've covered most of the questions.

Yes, Steven, Robert. I think you've addressed the questions you have from investors. And of course, the company will review all the questions submitted today and more public a response on the Investment Company platform. But just before I redirect Investors provide you with their feedback, which I know is particularly important to you both, Steven, can I just ask you for a few closing remarks.

Yes. Thank you. And again, thank you, everyone, for taking the time. I mean, I think the overall closing position for us is that we are incredibly fortunate to be focused in on this sector, especially as we look to the future. and the kind of economic volatility we expect to experience in the U.K. Grocery is countercyclical. It's very stable. And if we look at the sales growth we've seen in this sector, from pre-COVID to where we are now, for example, Sainsbury's, their sales are up 10% from where we were in COVID. This is a sector which is adding real value through the proposition that our tenants are making to the market. We see that continuing. So in that respect, we're quite confident and quite bullish about our future.

Steven, Robert. Thanks once again for updating investors today. Could I please ask investors not to close the session as you will now be automatically redirected for your feedback in order that the management team can better understand your views and expectations. This only takes a few minutes to complete, but I'm sure will be greatly valued by the company. On behalf of the management team of Supermarket Income REIT plc, we'd like to thank you for attending today's presentation, and good afternoon to you all.