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

Good morning, and welcome to the Supermarket Income REIT plc results presentation. [Operator Instructions] The company may not be in a position to answer every question received in 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 submit the following poll. And I'd now like to hand you over to Steven Noble, Chief Investment Officer. Good morning, sir.

Good morning, and good morning to everybody. Thank you for taking the time to join the presentation this morning. I'm joined by Robert Abraham, who is the Managing Director; for Supermarket Income REIT and myself, Steven Noble, CIO at Atrato. I wanted to start by quickly taking you through some of the key highlights before taking you through our financial results, which we announced yesterday. I'll then be taking you through some details of what we're seeing in the grocery market and how that impacts our investment strategy. And Rob will take you through the portfolio in a bit more detail before stopping for a Q&A at the end. So firstly, for us, our investment strategy is focused on omnichannel grocery stores, and that is the fastest growth sector in U.K. grocery. We also operate in the nondiscretionary grocery market. We secured [indiscernible] by property, predominantly led to Sainsbury's and Tesco's, and that delivers long sustainable returns. In addition, we have a robust balance sheet. Our LTV stands at 34% today, and our average debt maturity extends until 2027, a 100% of our debt is fixed at an average finance cost of 3.1%. And Rob will take you through that in more detail shortly. And during the year, it's been a highly active period for us. We disposed of our interest in the Sainsbury's reversion portfolio, receiving GBP 430 million, which we've now redeployed into GBP 400 million of new acquisitions at a yield of 5.5%. In terms of our financial results, key highlights, our total assets stand at GBP 1.7 billion. Our weighted average unexpired lease term is 14 years, and the portfolio yields of 5.6%. Our EPRA NTA as at the end of our financial year was 93p, which is up 1p from our last results in December. And our EPRA LTV at the reporting date was 35% but as a result of our post balance sheet restructuring [ net ] of our debt, which Rob will take you through shortly, that's now reduced to 34%. And we announced yesterday a dividend target for the financial year '24 of 6.06p. I just wanted to take you through our P&L quickly. In terms of our overall rental income, which is up 32%, and that's predominantly as a result of new acquisitions from the redeployment of the proceeds following the sale of our joint venture investment in the Sainsbury's reversion portfolio. And just to take you through that in a bit more detail. Our rental income has increased by GBP 20.7 million, and that's predominantly as a result of 9 new acquisitions again, at an average deployment yield of 5.5%. In addition, our portfolio has progressive rental reviews, which on average, was around 4.1% during the period and that gives us an annualized rental role of around GBP 103 million. And we've now hit a milestone for the property investment world of having a revenue profile, which is now in excess of GBP 100 million a year. Just turning to those rent reviews. 43% of our portfolio reviews on a 5-yearly basis and 56% of our portfolio has the benefit of annual rental reviews. During the year, we disposed of our interest in the Sainsbury's reversion portfolio, which during the period generated GBP 11.7 million of income distributed from the JV. Now the disposal proceeds were GBP 430 million, and that was disposed at a net initial yield of 4.3%. Administration and other expenses was up 11%, predominantly as a result of the additional size of the fund. But most importantly, our EPRA cost ratio declined from 16.5% to 15.5%, reflecting the growth of the portfolio benefiting us in terms of a lower overall cost profile. In terms of finance expenses, during the period, finance expense increased predominantly as a result of having larger total borrowings. And just to reiterate, our total debt is now 100% fixed at 3.1%, and we'll take you through our debt structure shortly. Altogether, our overall adjusted earnings was up 26%. And we use an adjusted measure, which gives a better reflection of the group's overall earnings during the period. And just to note, the adjustments we put through on EPRA earnings to our adjusted earnings includes adding back the benefit of our interest rate hedging derivatives, which is currently excluded from EPRA earnings and also adjustments for one-off nonrecurring costs. That relates to fees on the changing of our overall debt and also a one-off fee relating to the acquisition of BA's stake in the Sainsbury's reversions portfolio. And I just wanted to pause on that shortly to take you through the acquisitions that we did during the year of British Airways' stake in the JV. For those of you who know us well, we acquired BA stake in January '23 for GBP 196 million. And you can see that as a result of that acquisition, there were financing costs as well as interest rates. Now those costs were fully covered by the discount that we received on the purchase price from BA, but what we did achieve was an additional GBP 16 million of fair value gain on our acquisition, which we were delighted to deliver to shareholders and equates to roughly just over 1p on NTA. All in, our adjusted dividend cover that we reported yesterday stands at 97%. And looking forward, now we've fully redeployed the proceeds from the disposal of the Sainsbury's reversion portfolio that will be fully covered looking forward. I'll now hand over to Rob to quickly take you through the balance sheet.

Thank you, Steven. Good morning, everyone. So yes, gross assets, you can see highlighted there, up 4% on the year to GBP 1.873 million, this is, of course, as at 30th of June and prior to receipt of the remaining tranche of the JV proceeds, that gave us an EPRA NTA per share of 93p as at June and the EPRA LTV there of 35%. As I say, we then since have received further proceeds from the JV and that LTV today now stands at around 34%. So just turning to that movement in NTA, which was down from 115p last year. And you can see here, the valuation change really was felt in the first half, so reported as at December and you can see we remain broadly flat in the second half of the year. And then we've just broken that out in terms of a movement in NTA and you can see at December, that property revaluation moved NTA down to 92p since then valuations flat. But then also, as Steven just talked you through the gain on the SRP, the Sainsbury's Reversion Portfolio, which is the JV investment, just added that extra penny. So we are at 93p, so broadly flat in the period. Turning to our balance sheet strength. So this is the debt refinancing exercise we undertook post balance sheet, and you might have seen us announce this last week. So LTV reduced now to 34%, as I say, down from 40% at December. We've also extended the debt maturity profile out by 13 months now to February 2028. Cost of debt is up marginally from 2.9% to 3.1%. And we've also added a new lender. So relationship banks, they have gone from 7 lenders. We've added Sumitomo Mitsui or SMBC and taking the average hold of our lenders down by canceling some shorter-dated excess facilities. So average hold of GBP 85 million, which gives plenty of capacity within that banking group to step up in the future if we required it. And then also our proportion of unsecured debt, so increasing the flexibility of the balance sheet we've taken that from 48% to 61% today. And so then in terms of the strength of this balance sheet, you can see here top left, that LTV headroom. So we're 34% against the covenant of 60%, valuations would have to fall by 44% for us to breach those covenants. So it's very significant headroom likewise, very well covered in terms of interest cover. So we're absolutely comfortable with the current level of leverage. And then you can see there in the chart at the bottom, net debt maturity profile with some of the longest facilities out to FY 2030. But, yes. In summary, very, very strong position when it comes to debt financing. But then also, we undertook this exercise of amending our hedging. So we are 100% fixed cost of debt. We extended that by 12 months as well, and that was done at no additional cost. And we were able to do that because of the hedges we put in place early in the financial year had gained materially in value. We were able to recycle that excess value into extending the term of the hedges, and we have that 3.1% all-in fixed cost, as I said. Just on sustainability. So a key part of the strategy. I'll just take you through the headlines quickly. So first, fully TCFD compliant annual report, which, of course, is where the industry is moving to. So we're very pleased to have our first fully compliant report issued. We've also been making progress on commitments. So SUPR and Atrato have become signatories of the UNPRI and Net Zero Netter Asset Managers initiative. We're also aim to publish our own net zero target by the end of this year. We've made really good progress on stakeholder engagement. So our tenants are very ambitious net zero targets themselves. That means we get really good engagement from them on data, and we've just started to receive that data and we're working with them to further improve the quality and the depth of that energy consumption data. And then finally, just in terms of citizenship and communities, we've further improved our reporting around social activities there. And then there's also a commitment for the company to make donations to charitable causes during the year? And I hand you back to Steven to take through grocery.

Thanks, Rob. So just quickly taking you through the grocery market. So look, clearly, it's been a tough time for consumers given the high levels of grocery inflation. But nevertheless, grocery inflation does mean growth in the overall grocery market. And I wanted to start by just taking you through some of the key themes we've seen over the last 12 months. Firstly, inflation. It has been exceptionally high. It peaked at 19%. And we're now starting to see the discount to slow store growth due to predominantly a lack of available sites. Now Tesco's, Sainsbury's continuing to benefit from their existing and well-located stores and through their omnichannel strategy, further consolidating their position as market leaders in online grocery with the online channel remaining buoyant at 12% market share. And grocery is a growth sector. Since 2017, the grocery market has grown by 30% to GBP 242 billion today. And when we think back to when we launched the fund in 2017, it would have been unthinkable at that time that the grocery market would increase by close to 1/3. And given rents in this space are a factor of turnover, this growth is positive to the reversion value of our portfolio. And we can take you through that in a bit more detail now. So if we break out how this GBP 57 billion of growth is distributed by grocery fulfillment format. You can see highlighted in green here, the omnichannel, which is the focus of our investment strategy, accounts for GBP 16 billion of that growth. Omnichannel is the fastest growth format in U.K. grocery and our deliberate decision to focus our investment channel on omnichannel stores is how we are tapping into this largest growth format. And we can illustrate the value of that focus even further when we overlay this growth, but now at a property level. And you can see that in the case of omnichannel, growth has been compounding on existing bricks and mortar with one net supermarket opening during this period. Now in contrast, the discount segment has also been growing heavily over this period but growth is predominantly driven by new store openings by the discounters. And this demonstrates how our omnichannel store portfolio underpins not only our core income return but also generates a favorable driver for future ERV as well as reversion growth within our portfolio. Turning to inflation. I mean, the blue line here, we highlight grocery inflation since 2017. And you can see it peaked at 19%. The gold line is the average rental cap on supermarket property of around 4%. And you can see the difference between those 2 highlighted in green. As store sales grow in line with inflation, the affordability of our rents are increasing, resulting in a highly attractive rent turnover ratio. SUPR's average rent turnover ratio today is 3.8% of sales, and that compares to 4%, which is the U.K. grocery average and of course, compares highly favorable to other consumer service property sectors. Now turning to yields. On this graph, we showed the MSCI yield series for supermarkets, all property and logistics, supermarkets in the gold line. Turning to the right of this graph, you can see the relative softening of yields and the rebasing of value since September. Supermarket yields quickly rebased to a higher interest rate environment, with yields today of 5.9%, which is 100 bps wider than old property. But as Rob mentioned earlier, encouragingly, we've started to see a stabilization of yields now in the second half of our financial year. Now investment volumes in supermarkets have remained strong. In this graph, we show investment volumes over the last 5 years. And on the right, you can see in 2023 year-to-date, GBP 1.7 billion has been invested in U.K. grocery property, and we can analyze who's buying. Investment market transactions shown here in gray, account for GBP 1.3 billion of that investment volume or 76% of the market. And our volume here highlighted in gold was around GBP 400 million, which was the redeployment of the disposals we made during the year at a higher overall net initial yield. But in addition, Tesco's and Sainsburys remain active in acquiring their own leasehold property, accounting for GBP 500 million of volume. And it's worth noting that the supply and demand dynamics in the supermarket sector is unique given our tenants buyback activity of their own stores. And of course, it's no surprise to us that Tesco's and Sainsbury's are one of the biggest buyers of this asset class given the long-term value that we see in grocery property. I'll now hand over to Rob to take you through our portfolio in a bit more detail. Rob?

So we've grown our assets during the year, as Steve mentioned. So we've diversified that income stream. So now a passing out of GBP 103 million, that's very secure income stream, 100% rent collection since IPO, and that's the benefit of owning mission-critical real estate and we've got absolute certainty over our tenants desire to occupy the stores. And then we've also got that highly contracted rental growth of 78% of our rent reviews inflation linked. So we now have 55 supermarkets in that portfolio, These have been handpicked. So each store individually acquired 93% of those are omnichannel, and we've got that highly affordable, 3.8% average rent to turnover, which is ahead of the market standard of 4%. I did see a question come through on our portfolio ratings. You can see there primarily Tesco's and Sainsbury's as the largest share of the portfolio but then we also have some good coverage across the other major operators in the U.K. Just looking to the active management of the portfolio during the year. So again, GBP 430 million of disposals. That was 21 sites in the Sainsbury's reversion portfolio at a 4.3% net initial year, that was priced at the peak of the market, and then we're able to deploy that into higher-yielding opportunities to GBP 399 million of purchases, that was into 11 strong trading omnichannel stores at a 5.5% net initial yield. So just to take you through an example of the value we're able to identify in the market, this was Tesco, Worcester, which is the last or we acquired back in April of this year. It was an off-market transaction and sector specialists, we do see a number of opportunities off market. It was at 6% net initial yield. So it's a slightly shorter lease term than our portfolio average at 12 years. And it's got annual inflation linked reviews kept at 4%. But really, this ticks all the boxes for SUPR's investment criteria. So really strong trading store, producing GBP 65 million a year of revenue for Tesco, which makes it a Q1 trader. It's an omnichannel hub. It's got 9 home delivery vans operating from it and as I say, it's that annual inflation-linked lease. So yes, absolutely our target opportunities and lots of value for super that we can see in the pipeline. We're also looking to add value through active asset management of our larger sites. So examples here at Bristol, Basingstoke and Newcastle. These are obviously prime grocery locations and there's a lot of demand from discount operators for these types of locations. And we've seen the discounters slowing their growth because of the scarcity of good locations. So are they obviously very attractive to those operators? And with through these developments, we're targeting a yield on cost of 7% and so attractive returns achievable from these types of opportunities. Sustainability also features in our asset management initiatives. So in terms of solar and EV charging, both now 20% of the portfolio. And often these projects are achieved at zero capital outlay for SUPR given the net zero ambitions of our tenants and also the rollout of EV charging that comes at zero cost to SUPR. And then finally, just on non-grocery assets. So as a reminder, we're absolutely focused on acquiring the U.K.'s strongest performing supermarkets but sometimes they are located with other non-grocery that, in some cases, we're able separate the store in isolation from non-grocery but in some cases, you can't do that without impairing your control of the site and the value but it is only a small portion of the portfolio, 6% held at a conservative net initial yield of 80%, 75% are essential retailers. And you can see in the table there, it's well diversified. There's no kind of single tenant or sector exposures, and we also achieved very high rent collection and occupancy there in kind of 99% plus type territory. So yes, it's very much incidental to the supermarket rather than kind of a key focus of the strategy that we're quite happy to own and manage this stuff and we have the expertise to do it. I just hand you back to Steven there to conclude, and then we can hand over to Q&A.

Thanks, Rob. So look, as we look to conclude on the presentation, this is really how we think about the value within supermarkets. If we look at where are we projecting a levered IRR for this asset class of current yields, you can see it's around 12%, even with conservative reversion values and ERV assumptions. Now that compares highly favorable to see a comp in the market, which would be Tesco's bonds, which if you purchased to date, the yield to maturity would be around 7.2% versus 12% being secured by the property and owning the asset class. And of course, that compares highly favorable to the U.K. treasury gilt, 10-year, which is just below 1%. And just to reiterate, 77% of our portfolio is led to Tesco's and Sainsbury's. 78% of the portfolio benefits from index-linked rent reviews, and of course, operating in this sector, we've had 100% occupancy and rent collection since we launched the fund. And in terms of our overall outlook, I mean, our investment strategy is underpinned by a growth sector. In addition, as Rob took you through, one of the things we really love about this asset class is the enhancing sustainability characteristics as our tenants progress towards their overall net zero strategy by 2035. During the year, we've been working incredibly hard on recycling capital. We disposed the interest in our Sainsbury's Reversion Portfolio at a yield of 4.3% and redeployed that capital at a yield of 5.5%, and you start to see the benefit of those earnings accruing through our P&L. And lastly, our overall portfolio is secure income, predominantly Tesco's, Sainsbury's batch by grocery property. And over the long term, this provides really attractive total returns for our portfolio. I'll pause there and turn over to the Q&A if that works.

[Operator Instructions] Steven and Robert, thank you very much for presentation. [Operator Instructions] But just while the company take a few moments to review those questions submitted today, I'd like to remind you that a recording of this presentation, along with a copy of the slides and the published Q&A can be accessed via our investor dashboard. As you can see, we received a number of questions throughout today's presentation, if I could just hand back over to you just to read out those questions and give responses where it's appropriate to do so. I'll pick up from you at the end.

No problem. Thank you. Plenty of questions coming in. When I compare -- and Rob, I think, we'll -- and the first one over to you. It's a question come in. Apologies there's no name. How will the portfolio to sales of Sainsbury's impact EPS going forward? Do you want to take that, Rob?

Yes. So we touched on that disposal earlier. And of course, so upon that disposal, there's income falls away, and that was around kind of GBP 12 million a year coming through. We have since redeployed proceeds from that sale into accretive omnichannel acquisitions. As I mentioned, GBP 399 million deployed at 5.5%. And we've also repaid some debt. So actually, that is how we've replaced the earnings. And now we're looking forward to with the fixed cost of debt and also our rental growth coming through -- we're looking forward to EPS being maintained and providing a fully covered dividend going forward. So you can expect EPS to be kind of in and around that 6.06p, which is where the current dividend is.

I hand over to you as well, Rob. I think we touched on in the presentation, it's probably worth a quick refresher. What does the rent review profile look like over the next few years?

Yes. So we have the mixture of annual and 5 yearly reviews. So around 56% of the portfolio reviews annually and the rest is 5 yearly but just 1 that reviewed on a 7-year cycle. So there is a bit of lumpiness to the reviews as they come through but average cap on those is 4%. And predominantly the inflation reviews around 80% inflation linked, they have an average cap of 4%. So generally, if you're looking forward, you can expect us to kind of be tracking close to that 4% in terms of average uplift as we see all of those reviews hitting their caps currently. So yes, as I say, this year was slightly quieter in terms of the 5-year lease but it just depends on the data which they fall.

Got one from Matthew, just around the dynamics of the 5 yearly rent reviews.

Yes. So that's a good question. So typically, the cap applies. So there will be a 4% cap, for instance, that will apply on an annual basis. There are some in the portfolio where the cap is a compounded over the 5 yearly. So for instance, it will be at 21% cap over 5 years but it is absolutely contractual. So there is no negotiation around how those reviews apply. It's just a formulaic calculation and the tenants never dispute it. One of the -- we think, a benefit of actually having the capped at 4% is that it means the rents will always grow at a sustainable level. And if you had uncapped reviews potentially in the current environment, you could see rents kind of running ahead of market, that doesn't happen in this instance.

Thanks, Rob. Question coming in from Charles regarding the dividend growth rate, which is a fair question. Can you explain why the dividend has not risen near the rate of inflation. Do you expect this to reverse when rates remove lower? Perhaps I can take that one. It's a good question, Charles. Obviously, us and other real estate companies not immune to the increase in interest rates. So during the year, we did increase our overall interest rate hedging to 100% of debt, and now that looks at 3.1% going forward. So we're locked in for the maturity of our debt term. And if you extrapolate that forward, that does generate 100% dividend cover of our current dividends, which we increased to 6.06p. And if you look at our dividend cover, for this financial year at 97%, I mean we're pretty much fully covered at that rate. So in answer to your question, why the dividend cover hasn't grown further, it's predominantly due to the higher interest rates, which we've now locked down going forward. And of course, the Board is committed to a progressive dividend policy but we always want to make sure that the dividends we pay out are fully covered. It's a really good follow-on question from Matthew about the size of the market in the context of Tesco's and Sainsbury's buying back. I'll probably cover that one quickly. For those of you who know us well, we've always said, look, the Supermarket property across the U.K. is worth around GBP 85 billion in terms of total value. And we believe around GBP 30 billion of that is in the leasehold market. That's currently what's available for investors. Now as you would have seen from the presentation, Tesco's and now Sainsbury's have been progressively buying back their leasehold stores. So that GBP 30 billion is shrinking. But nevertheless, it's still a big market. We have GBP 1.7 billion of capital value of grocery property, that's around 6% of that GBP 30 billion market. We think we can grow further, subject to our seeing kind of exceptional value opportunities. But overall, that GBP 30 billion is declining, which in our view, is one of the unique factors of this as a real estate investment proposition that our tenants are one of the biggest buyers of grocery property. And as this asset class becomes scarcer, we believe that will add further value enhancement for the future. Just going to jump on to another question. Apologies, I'm just flicking through and reading these live. There's a fair few coming through. A question from Matthew again on the portfolio mix. I think Rob has taken you through that, but also some related questions around how we think about Asda and Morrisons. If you want to take that one, Rob.

Yes, sure. So I guess how we think about Asda and Morrisons, clearly, we've got a weighted Tesco's and Sainsbury's, and we think that's probably positive in the current environment, the 2 of the strongest performance and also the strongest covenants. But also, we look at the likes of Asda and Morrisons, still strong operators, large market shares. They just carry some additional risk given their higher levels of leverage, but we have some Morrisons exposure in the portfolio around 6% as to 2%. We wouldn't be materially increasing that unless we were kind of really confident in the stores, the stores we already own are very strong performers, and that gives you good confidence that in the kind of absolute worst-case scenario, you would -- that would still continue to operate as a grocery location. So for us, it's all about underwriting at the store level and making sure that you're buying the very best grocery locations in the U.K. The scarcity of locations, you can't find another 10-acre site in residential catchment that just don't exist anymore. That just gives you good confidence if you've got the right of store -- the government stores in the catchment, you -- it will continue to operate as grocery over the long term. So that's kind of how we think about those 2 operators but certainly a positive on the whole, I think, for investors that were weighted towards Tesco's and Sainsbury's.

And a couple of questions coming in, Robert. On spread differential between, say, Tesco's, Sainsbury's relative to Morrisons and Asda net.

Yes. So for the same reason, with that additional kind of risk in the covenant, we do see pricing differentials. So your kind of a rented Tesco's and Sainsbury's will trade around kind of 5%. We've seen that Tesco Aylesbury traded during the year with a 14-year remaining lease term that has been [ repeated ] by Tesco the previous year. So was rack-rented that went for 5.1% to BlackRock. There's also a Sainsbury's in Islington. So London products like more unique but 20-year rack-rented again, have been regeared by Sainsbury's that went of 4.1%. There were 6 or 7 bidders there. So that just shows you those kind of unlevered purchases and targeting those top-quality Tesco's and Sainsbury's willing to pay kind of in and around 5% and sometimes tighter. On the other side, Asda and Morrisons, the Asda sale and leaseback royalty income is in the process of completing GBP 650 million there, that's at a 6.4% net initial yield for 20-year exposure. So that just, I think, illustrates that spread differential of around kind of 150 basis points for good quality rented long-dated stores. And then we do see kind of weaker quality over rented stores, for Asda and Morrisons trading into the 7s.

Fantastic. Another questions come in. There's a lot of questions coming in. So it's fantastic to see. Thank you all for submitting these. One of the questions that has come through. Apologies, I can't see the name. But it was a question around our total shareholder return. Sorry, it's coming in from Phil. It's usually a KPI. What was that during the period? It's a good question, Phil. So it is in the annual report. So obviously, the share price last year was 119p. The share price, as with all REITs declined as a result of the increase in interest rates and the rebasing of capital values. So rather disappointingly, the share price closed at 73p on the results. And I think we're currently trading at 79p today. So if we also adjust for the 6p dividend, it's an overall 27% reduction in total shareholder return, and that's obviously reflecting the rebasing of capital values across the property market. Another question just coming in on, who was the seller of Tesco Worcester and who's selling in this environment. Rob, if you want to take that?

So that was actually British Steel Pension Fund, which is disposing off its commercial property. And I think I saw the question there saying, was Tesco interested in acquiring it? So yes, absolutely. This is -- and one of the points you make is we target the top trading stores. And of course, we know Tesco are actively buying back stores. So naturally, they are interested in buying into. They did -- it was on their target buyback list. They did actually go to committee for -- to buy that back in but they didn't get approval. So the point being these stores are on Tesco's target buyback list but they do have to go to committees. There are capital considerations. They're buying back shares, they might be reducing leverage. So there are other areas in which they deploy capital, and the way they describe it to us is they don't have a blank check book. So that just means they were kind of quietly participate in the market. They bought 1 or 2 stores just prior to Worcester. So they used up some of their available capital for buybacks and that means that the opportunity was there for us to buy it. So we've -- since IPO, we would have been able to participate alongside Tesco. We own some of their very best stores in the country. And yes, as I say, naturally, they would also be looking to acquire some of those as well.

Thanks, Rob. Questions coming in on the overall size of our non-grocery portfolio? And any thoughts on how much capital would have to deploy into the asset management initiatives. I hand that one over back to you.

Yes. So look, as I mentioned earlier, non-grocery is about -- is incidental to owning top-quality supermarkets. It's natural that top-quality stores and adjacent retail operates very well together, the likes of kind of pets at home, boots, they really like to be located next to a store and there's the complementary drivers of footfall between the 2. 6% of the portfolio currently. I wouldn't ever expect us to materially increase it from the -- this is about kind of sites that are 80%, 90% and the value sits with the food store itself. And this is about site control. So when you've got 90% of your value sits with your grocery tenant, you want to have full control of that site if they want to redevelop, if they want to grow their omnichannel, maybe add some [ click and clicks ] in the car park, put EV charging in the car park, then we have the absolute freedom to be able to do that. If you've sold off your -- the non-grocery element, then you're not able to do that. In terms of the actual asset management initiatives, then these are kind of relatively low cost. They're nice drivers of additional returns for shareholders. But we're not talking kind of significant sums going into development in the context of a GBP 1.7 billion portfolio. Each of the development projects is maybe up to GBP 10 million, call it. And there's a handful of those. So yes, we're not talking significant sums, as I say, in the context of the portfolio.

A couple of questions coming in from Dan, which I can take. So one was around the increase in the OMV exposure. That's right down, it's up to around 20% of the portfolio today. Obviously, one of the things we look for predominantly in our acquisitions is around future rental as well as value growth. And overall, our asset acquisitions target what we believe are the best properties in U.K. grocery. And we are seeing greater value now in open market rent reviews, predominantly because of the grocery growth that we talked about. So there's always a lag by the time in which this eventually filters through into rent reviews. And most of the open market rent reviews are also on a 5-yearly basis, creating another lag depending on when those rent reviews are. And that's one of the reasons why we've slightly increased our exposure to OMV as opposed to contractual uplifts on RPI is we just think there's an opportunity for greater value growth than those rents. So hence, the slight pivot. And another question from Dan was around the 4.1% rent review. Apologies if that wasn't coming through Dan, but that is the like-for-like rental growth. So on average, it was 4.1% on a like-for-like basis, slightly higher than our average cap. Again, the cap of 4% is an average. So with a mix of some 5 years as well as some rent reviews, which capped a the like-for-like growth was 4.1%. Again, the presentation is online. So if you need further details on the rent review mix, it is there. Just going to turn to a question from Andre that came through, which I think is a really good question, Andre, around, well, will you be a buyer or a seller of supermarkets over the next 12 months? I mean, how are we thinking about the value opportunity right now is that there is a lot of value in the reversion value of supermarket property when leases mature. That's both from a capital perspective as well as a rental perspective. So I think how we're thinking about the next 12 months is, can we continue this theme of recycling capital into higher-yielding opportunities and capture some more of that reversion growth coming through the portfolio. We did GBP 400 million of that this year, selling out at a 4.3% net initial yield and buying back in at a 5.5% net initial yield with equally good properties within that mix. So we hope to do more of that next year. Obviously, it won't be on the same volume of around GBP 400 million. And that's the thoughts on our strategy going forward. Quick question. Technical question, just to clear this one up, Rob, that came in from Phil on the 5 yearly rent reviews. If inflation was 8%, 0% and 8% and then over that 5-year period, would you capture that profile? Or would it be an average?

Yes. Good question. So as I said earlier, those caps apply on an annual basis. So in the year where there's 8%, then you'd realize 4% and then in the year you realize 0%, you'd realize 0% or potentially actually our average for in the portfolio is more like 1%. So you would still get some growth. But yes, you're right. Typically, that cap applies annually and then also, we do have some though where the cap is over the 5-year period. I mean I guess the question that I saw there was another question of why is the cap so low at 4%? Well, actually, I think -- as I mentioned earlier, we see that cap level as a sustainable growth cap and it ensures that in a higher inflationary year, your rents don't grow to an unsustainable level. So yes, actually, we see that as a net positive. And as I say, in years gone by, the questions were more focused on where our floors were than where the caps were. So things can change quite quickly on that. But we think that the current profile of average 1% flow, call it, and 4% cap is a sustainable and attractive growth element.

Great. I'm just conscious, we're buffering against time. So quickfire on the last few questions, and apologies if we didn't get through all of them. We hope to have covered most of the core topics. But one other questions was around what was driving the sharp reduction in property values, coming from Tom. I mean across the real estate sector, I think we've seen a rebasing of discount rates because of the increase in interest rates. And that in turn has adjusted the risk-free rate that's implied in a lot of discounting of cash flows on property. Will we see that reverse? Well, I think it's a really good question for 2 reasons. One, yes, as we look forward, where will interest rates go and of course, we do have an announcement from the Bank of England later today on whether there'll be another rate rise or not. But we're seeing a lot of leading indicators now towards lower inflation. And hopefully, that will ease the pressure on interest rates. But also, I think one of the key things we wanted to stress in our results and to talk to you about today was just the value of existing property because the cost of rebuilding, the cost of developing new real estate is obviously incredibly high at the moment because of the inflationary pressures, whereas existing real estate has a value premium. And as we've presented on the market growth pages when we think about GBP 16 billion of omnichannel growth, that's all consolidating on existing real estate. So over the longer term, we're going to start to see rental growth on existing property. And of course, that's another factor, which is driving property values is just what is the rental growth on -- or what is the real rate of rent on the reversion of the lease. And in that respect, that's where we see one of the real attractions in grocery property is that the fundamentals are just directing us towards higher rental growth, especially when you think about how affordable our rents are. And that was another question that came in very quickly around, well, what happens at the end of the lease, what happens to rents? Well, just to be clear, when our leases expire, there is a rebasing to market rent. So it's a discussion with our tenants around the renewal of that lease and that will be done on a market rent basis. A quick question for Simon. Do you have much cash left for acquisition? Just quickly on Simon. We do have over GBP 100 million of banking capacity available to us but the Board are quite comfortable at the moment with our leverage in and around 34%. So we don't see that changing in the short term. Another question that quickly came through was around our marginal cost of borrowing. Rob, just quickly, where do we think that is at the moment?

Yes. So look, we benefit -- as I mentioned earlier, we've got a really good, supportive diverse banking group and supermarkets is a sector that's really well understood by lenders, very defensive. So that means we get some really attractive debt pricing, the latest facility we entered into with SMBC was priced at a margin of 140 basis points over SONIA, which, as I say, compares very, very favorably to other sectors in commercial real estate at the moment.

Another question coming in on the management fee and why is it based off NAV, not share price. It was one of the -- when we set up the fund we pegged the management fee to a NAV, of course, when we're trading above NAV, that's beneficial to shareholders. So in that respect, our management fee structure is very simplistic. It's just based off a rate on NAV, which obviously declines as NAV grows. Again, if anybody wants more details on the scaling of that fee, it is in the presentation, which is available on our website, just conscious of time. Just might try and squeeze in the last one with shares at a 22% discount to NAV, would you view buying your own shares? Is that a better use of capital versus the stores? It's a great question to finish up on, Dan. Look, long term, our IRR assessment of this asset class is around 12%. So in respect of investing and recycling capital into an opportunity that provides a 12% IRR with fairly conservative assumptions that rents will grow in line with inflation. I feels like an incredibly good value for us, especially when we consider it on a relative basis, given the risk profile we secured by property and our tenants at Tesco's and Sainsbury's and this asset class generates a lot of relative value and say, comparing that to the bond market. Now equally, we think there's further value growth to come through rents and the value growth that we took you through on overall grocery growing at a rate of close to 30% over the last 6 years. That's going to add more value to this asset class. Now in contrast, using capital to buy back shares in one way that would just increase the overall funds leverage. So right now, we think the best use of capital is into purchasing the overall stores.

Perfect. Steven, Robert. I think, I might stop you there. Thank you very much for addressing all of those questions from investors. And of course, the company will review any further questions received today and we'll published their responses out on the Investor [indiscernible] company platform. But just before redirecting investors to provide you with their feedback, which you know is particularly important to the company. Steven, could I just ask you for a few closing comments?

Yes. Again, overall, when we think about our investment strategy and the type of assets that we own and the current state of the market, we do view ourselves as highly secure income but over the long term, given the growth in the grocery market and specifically the growth in this specific asset class omnichannel supermarkets, we're cautiously optimistic in the short term around property values. But over the long term, we see this asset class as delivering highly attractive and highly secured returns for shareholders.

Perfect. Steven, Robert. Thank you once again from updating Investors today. Could I please ask investors not to close the session as you now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations. It will only take a few moments 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.