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

Good morning. Welcome to SUPR's full year results. This is a year as the title says in that we've really established a SUPR as a platform for growth. So we're committed to delivering value to shareholders. And we've been progressing on that strategy to grow gross assets today at GBP 2.2 billion. That includes our 50% share of the joint venture and is up from GBP 1.6 billion last year. So as we've been delivering those earnings enhancing transactions to grow the portfolio, we're now able to announce a 2% increase, which is sustainable in our dividend for the coming financial year or the current financial year. And then the benefits of that scale coming through also now in the cost ratio, so 9.2%, and we expect that to improve further as we grow. So that's the result of a highly active year of strategic progress. We scaled the joint venture with Blue Al to GBP 855 million through a series of transactions, and that includes capital recycling as we've transferred further assets from our balance sheet into that vehicle. We've also then -- that's enabled GBP 676 million of earnings accretive acquisitions since July last year. That includes a number of portfolios, sale leasebacks direct with operators and also 19 stores, which we acquired in the secondary market. We've also undertaken GBP 1 billion of debt financings. That included our debut public bond, which was well backed, and then, also following the end of the financial year, the proactive lease renewals. So this is proving sustainable rents on 2 stores as well as we expect it to be accretive for total return. And then lastly, of course, delighted to raise GBP 100 million in July, the proceeds of which have now been fully deployed. And that deployment was the first step towards our ambitions to double the size of the portfolio. And you'll recognize this slide from our interim results back in March. And we then talk to the avenues for growth across store formats, geographies, also grocery distribution and the ability to, as we grow the portfolio, maintain those attractive investment fundamentals across the bottom of the page. So that -- those proceeds have been fully deployed in the space of 2 months. It was our first equity raise since 2022, and we've acquired 9 high-quality grocery properties for a total of GBP 222 million. 82% of that income is investment grade, 87% is inflation linked, and at a 6.6% net initial yield that means it's accretive to earnings and therefore, supports our dividend growth target. And of course, that scale also further reduces the already very efficient cost ratio. So to take you through a few examples of what we've been buying. The high-quality grocery properties on the left, Tesco Edinburgh. This is a large format top-performing omni-channel store for Tesco 5 years remaining on the lease, and it's a bit over rented, but that gives us a really good opportunity to unlock some value in the future through a lease renewal. Then, in the middle, Sainsbury's Avonmouth, this is a brand-new mission-critical logistics warehouse for Sainsbury's. And with a 14-year lease at a very low affordable rent of GBP 14. We've also seen the tenant makes significant capital investment in the fit out of this building. And then on the right, M&S, grocery-anchored retail park in Nottingham share. Now this was an interesting 1 because we had an under offer back in February. And then we -- when the Iran conflict began we sought to reprice that asset. The vendor chose to walk away at that time. But it came back to us very recently on the basis that we could transact very quickly. We've done pretty much all of the due diligence back in February. So we were ready to go. So it came back at an even lower price than before. But the interesting opportunity for us here is there's an open market rent review coming up. And I'll talk later to some of the evidence we're seeing in the market for higher rents, but certainly an opportunity for us to really push that on. So we've been clear on the ambitions to grow. We've got various sources of capital to deliver that. I've talked already there to equity raising, also joint ventures, as we've successfully done with Blue Island, of course, we get the benefit of management fee with that. Also debt financings, we have very strong liquidity in the various debt markets. And then lastly, capital recycling. And now that can be outright store sales as well as transferring further assets into potential joint venture vehicles. So with that, I'll hand over to Mike to take you through the numbers.

Great. Thanks, Rob, and good morning, everybody. As Rob mentioned, it's been a busy period for the company. We've executed a number of strategic initiatives that have been designed to strengthen the business and position it for future growth. As I outlined at the half year, these actions have had a short-term impact on earnings. However, they've materially strengthened the company's foundations and enhanced our ability to deliver a sustainable long-term shareholder value. So if we turn to the headlines for the period, you'll see net rental income increased by 6% to GBP 122 million. The EPRA cost ratio improved to 9.2%, which is a reduction of 380 basis points. EPRA earnings of 5.7p was down 4%. The portfolio, which reflects post year-end activity, increased to GBP 2.2 billion, which is up 37% since June '25. Our EPRA NTA was marginally higher 1.5p and, and taken together with dividends paid in the period, the total accounting return was 7.5%. So as I mentioned, the key focus this year has been on redeployment of capital following the completion of the joint venture in May '25. As you can see from the bridge, part in red stood at GBP 17 million immediately prior to this transaction. The assets that were transferred into the JV reduced rent by GBP 21 million, but this was more than offset by the GBP 454 million of acquisitions that were completed during the year, which added GBP 31.8 million of rent, and that reflects an average net shield of 6.5%. Together with the GBP 2.1 million of like-for-like growth, passing rent increased to GBP 129.5 million at the year-end. And following the equity raise, which completed shortly after the period end, we deployed these proceeds into earnings enhancing acquisitions, adding a further GBP 14.8 million of annual rents. And therefore, as a result, the pro forma passing rent has increased to GBP 144.3 million, which represents a growth of 23% since completion of the JV. Now importantly, we've delivered that growth while maintaining the quality of our income with 100% occupancy and rent collection, 75% investment-grade income and a sector leading 99.5% gross to net income ratio. And what we've shown on this slide is the value created for our capital recycling. We've transferred GBP 635 million of assets into the JV at a 6.2% necessary yield, and we've redeployed those proceeds at an average yield of 6.8%. Together with the recurring management fee, this has generated an incremental spreads of around 120 basis points. And as we've shown on the right, this translates into approximately 0.3p per share of annualized net income accretion. And we've achieved this whilst maintaining 50% exposure to the underlying portfolio and delivered net income growth through high-yielding assets and the recurring management fee. So key objective of internalization was to create a scalable platform that was capable of supporting growth without a material increase in overheads. And the chart on the left shows the progress we've made. Since internalization, the EPRA cost ratio has reduced to 9.2%, which is a reduction of 440 basis points or equivalent to approximately GBP 4 million of annual cost savings. While we will continue to invest selectively to support our future growth, we remain on track to reduce the EPRA cost ratio to below 9% for FY '27, which will reinforce our position as 1 of the most cost efficient companies in the listed real estate sector. As we continue to grow the portfolio, additional income can be delivered at relatively little incremental cost creating operational leverage and supporting future earnings growth. So turning to earnings. EPRA EPS reduced by 4% to 5.7p per share compared with 6p in the prior year. One of the drivers was the transfer of assets into the joint venture, which reduced earnings by 0.3p, as we recycle the capital and redeployed the proceeds into future growth opportunities. The increase in our weighted average cost of debt reduced earnings by a further 0.4p, which was largely driven by the issuance of our debut public bonds. Now, while this has reduced earnings in the short term, it's materially strengthened the balance sheet through longer debt maturities and a more diversified source of funding and has increased our proportion of fixed-rate debt at attractive pricing. And against these items, the business continues to deliver growth. The new JV management income fee is contributing 0.1p whilst like-for-like growth adding the further 0.1p. In addition, the benefits of internalization and our disciplined cost management contributed 0.2p, reflecting the operational leverage now within the platform. Overall, while EPS was marginally lower during the year, we've strengthened the balance sheet, reduced our cost base and invested capital into earnings accretive acquisitions that are expected to support future earnings growth. So turning to the balance sheet. We continue to deliver an income led to total return. Starting with the chart on the left, EPRA NCA increased to 87.5p, up from 87.1p at June '25. EPRA earnings contributed 5.7p or dividend paid totaled 6.2p in the year. The portfolio delivered 2.8p of realized and unrealized gains, equivalent to 2.5% like-for-like growth, which was partially offset by acquisition-related costs. Overall, EPRA NCA was 87.5p, and the total accounting return for the year was 7.5%. Now, turning to the chart on the right, what really differentiates SUPR is the quality of that return. Approximately 90% of our total return is from contracted income to investment-grade occupiers, and that compares to a sector average of 57% income return. Now as a result, shareholder returns are driven by -- primarily by recurring cash earnings rather than being reliant on valuation movements, providing a more resilient and reliable source of long-term returns. We've been active in the debt capital markets, and we will continue to manage our structure proactively. Since June '25, we've completed approximately GBP 1 billion of refinancings improving both maturity and diversification. The chart on the left shows our position a year ago where maturities were more concentrated with an average of 2.8 years. And since then, we've completed a number of strategic initiatives including our debut public bond issuance and the refinancing of our revolving credit facilities after the year-end. Now, on the chart on the right, you'll see these actions have extended our debt maturities to 3.6 years and removed any refinancing requirements now until June '28. Following the refinancings, our weighted average cost of debt improved and today stands at 4.4%. But importantly, 98% of that is fixed or hedged until June '28, providing a high degree of protection against any interest rate volatility. And our BBB+ investment grade credit rating remains an important strategic strength, and we continue to manage the balance sheet in a manner consistent with maintaining this rating. We've been very active in the investment market, and so, on a pro forma basis, have taken leverage to 45%, as we execute on our pipeline. As we have demonstrated historically, we will manage leverage through the cycle, balancing growth opportunities with maintaining our investment grade credit rating. We monitor leverage through both loan to value and net debt to EBITDA. For the year to June '25, our net debt EBITDA was 7.8x. And with the benefit of a full period of income from recent acquisitions, we expect to operate at the lower end of 7 to 8x range on a normalized basis. As I said, our income is largely backed by investment-grade tenants, providing resilient and predictable cash flows that support operating at the current LTV. At the same time, we will remain disciplined in managing leverage and continue to maintain significant headroom across all of our debt covenants. So in summary, we are well placed to deliver on our strategy. We have successfully redeployed capital, completing GBP 676 million of earnings accretive acquisitions. We've built a scalable platform with 1 of the lowest cost ratios in the sector, and we've delivered a 7.5% total accounting return, which is underpinned by highly secure investment-grade income. Collectively, the actions we've taken this year have strengthened the business and positioned us to deliver future earnings growth and long-term shareholder value. And with that, I'll hand you back to Rob.

Right. So the grocery sector now, which is, of course, growing so highly resilient and backed by nondiscretionary consumer spending. And it's the omnichannel grocers that we continue to see dominating the market. So Tesco, our largest tenant, GBP 44 billion of annual sales in the U.K., 28% market share and that increases to 37% in the online channel, and we said this before, but it's the omnichannel grocers that are best placed to win through scale and particularly the scale of their large format store estates. And we're seeing that with omnichannel stores capturing the majority of sales growth. So on the left-hand side, double-digit growth in online and omnichannel stores is combining that with large format store sales in the middle, in-store sales growing at around 4% a year for the last 2 years, and this is from Tesco's full year results. And then in the convenience channel, remaining broadly flat over that same time period. So the reason for that is large format stores provide better value and greater choice for consumers. On the left-hand side, the price comparison of a weekly shop in the Tesco Convenience Express channel, versus if you shop in the large format stores, around GBP 800 a year of savings. And then, on the right-hand side, so not only our items often 10% to 20% cheaper you've got a much bigger product range, of course, at 20,000 to 30,000 products. And not only that the chance of the product you want being in stock is much higher with availability at 91%. That increases to more like 97% in the best cases compared with 82% in convenience stores. So we're seeing this come through at the portfolio level. So omnichannel sales are growing, store sales are growing ahead of rents. This is -- this chart is a store from our portfolio. This is actual sales data over the last 3 years, and you can see store sales in that time have grown by around 18%. At the same time, the contracted rental growth of around 12%. So that means the rent to turnover has improved from 4.1% to 3.9% over that period, and that just means that, that contracted rental growth that we receive is absolutely sustainable for the tenants. And omnichannel stores are also great drivers of footfall, and we're able to generate value for shareholders through active management of the sites that we own that are retail parks, and we've got a number of these in the portfolio. This is our site in Bristol and can buy Tesco, but where we're building a new little store as an extension to the retail warehousing terrace that's there, 20-year lease to little inflation linked and with attractive returns at an 8% yield on cost. And then, if we look a bit closer at that retail warehousing lineup, so you can see how, since acquisition, we've improved that tenant mix. So we had Argos paying rent but wasn't trading from the store that's been relocated to a nearby Sainsbury. So clearly, that was going to go avoid in the future. And then we also had concessionary lettings to one beyond and pound stretcher. So since acquisition, we've combined 2 of those units to create the new B&M store on a 10-year lease. We've renewed the boots lease through a new 5-year term. So those 2 transactions combined with that new little means that we've increased the wall by 6 years. We've got 100% occupancy to national retailers, and we've grown the net rental income for that retail warehousing by GBP 400,000 and achieved a 10% valuation increase. We're also able to unlock value through lease renewals. So 2 of these signed in July, large-format omnichannel stores, top performers, where in 1 case, 15% rent reduction; in another, we renewed at a passing rent, both through a new 15-year term. And it's worth noting that there's no rent-free periods, there's no landlord capital contributions, which are very much standard in lease renewals in other sectors. So through these lease renewals, we expect a positive impact on valuations, and therefore, to enhance total return. And not only are we seeing evidence of those affordable rents through lease renewals, you're now also seeing it come through on new store lettings. So the examples on this page 2 of the M&S conversions of Homebase stores, new 20-year index-linked leases being agreed at initial rents of GBP 24 and GBP 28, and we're starting to see that inform open market reviews. So the example there, Waitrose in Surrey achieving GBP 24 rent per square foot on open market review, that's up 16%. So in that context, our average rent to turnover 4% average rent per square foot of GBP 23 looks highly affordable. And then in the investment market, so we're seeing some pretty tight yields being achieved core capital buying into food stores. That isn't anything new, but Sainsbury's in Hartford here on the left there, 5% net initial yield, 15-year lease with open market rent reviews. So the purchaser is absolutely buying into the prospect of rental growth to achieve their returns there. In the middle little sale and leaseback 20-year leases, these are stores that are being built at the moment, 4.8% net initial yield, and that's come from local government pension scheme or LGPS money. And then lastly, on the right-hand side, Morrisons Plymouth, 22 years on that lease. So this was a same leaseback a few years ago around a 6.1% net initial yield for that, and that just reflects the sub-investment grade covenant again from government pension scheme money. But the point here is it just reinforces the attractiveness of grocery property to core capital. And of course, we looked at these opportunities but we've seen better returns elsewhere, and we have been very active in the investment market ourselves, GBP 676 million of earnings accretive acquisitions. That's redeploying the capital from the joint venture with, but also from the equity raise in July across that range of strategies, you can see on the page. And I mentioned earlier, being able to maintain those attractive fundamentals, so 6.5% net initial yield 13-year average lease length, 94% of that is inflation linked and 74% is investment grade. So with that, we're well positioned to continue to grow. It's been a highly active year of significant strategic progress for us. We're targeting a strong total return, and that's backed by high-quality income from the leading supermarket operators, and we've got multiple avenues to grow and drive those shareholder returns going forward. So with that, we will hand over to questions. Thank you.

John?

John Cahill from Stifel. Your growth ambitions are clear and very much welcome in a sector that's otherwise feeling pretty down in the math about life. So I just wanted to ask you about the investment market, 2 sides to it. First of all, 1 of the supermarket operators thinking about life? Are there still leaseback opportunities? Are they buying back in again? And then secondly, in the sort of secondary investment market, is the uncertainty in the wider macro environment throwing up any opportunities? Is there anybody coming to market, not naming them, but are you seeing supply coming forward?

Yes. So I guess on the supply demand for the operators, it's still very much led by balance sheet. So Tesco particularly still very much active buying stores in selectively. So individual stores in the secondary market slightly opportunistic there may be certainly don't buy everything. As we've said before, it's not a blank checkbook for them. So we're still able to get our hands on, and I spoke to 1 of the Tesco stores we bought being a really strong opportunity for us to renew that lease going forward. At the opposite end, you've got Astra Morrisons. Now they have done quite large scale sale leasebacks already, but I think there's potentially some more to come there, and we did the asset sale leaseback into the joint venture. So with the phase of deployment we've just been through most of was investment-grade income. So we've got some capacity, I'd say, to do a bit more with the sub-investment-grade names. And then beyond that into the investment market, I think spoke to some of those transactions with the core capital. I think it was quite interesting 2 out of those 3 were kind of well after the start of the year on conflict and when you're seeing cost of capital increase. So I certainly think that core capital isn't going anywhere. I think we still got very strong demand at that end. That said, the M&S example I gave was 1 where the vendor when we reprice back in February thought they could do better and came back to us and maybe there was a bit of pressure because it was done to a very expedited timetable but an even better price. So we'll continue to look very closely. We see everything in the market given our position in sector specialist. So that means we can be selective in the pipeline today. It's over GBP 500 million. And kind of it just comes down to where we can best allocate the capital between those opportunities, and we've got a range of funding sources to do it.

It's Matt Saperia from Peel Hunt. 2 quick questions for me, if I may. First 1 on the 2 lease renewals you did, driven by yourselves or by the occupier? And given your sort of comments around, it feels like rental growth across the -- increasingly across the market. Are you likely to be more proactive on tackling some of the upcoming lease renewals? And what does the sort of pipeline look like?

Yes. Thanks, Matt. So I think those were again -- those ones were proactive on our part as were the lease renewals we did a year ago or so. Now the point with those first lease renewals was proving that some of the fears around over-rentedness were overbaked. So that actually rents on where overrented stores wouldn't come down by as much as some were speculate since they came down to 4% rent to turnover. In that case, the point here for us we're showing actually some of the stores in 1 of the examples they are renewed at passing rent. So there was no rent reduction. So we do have some stores that are more under-rented, and we're able to extend the term without having to give a rent reduction. So it was really kind of trying to prove the opposite end. I don't -- we're certainly not under pressure to renew any leases. We haven't got anything shorter than 5 years or so, but it will just come down to yet if we can achieve a positive total return, then we'll continue to consider doing it, but there's certainly no pressure.

And what we've said before is that where you have these regears and the examples that Rob gave where there was a rent reduction in the prior year, the contracted income we have in the rest of the portfolio should offset any rent reduction and you saw that this year with EPRA like-for-like rent was up broadly 1% with those sort of regears into account. So we have the ability with that, yes, the contract in nature of our income to offset those and if there was a material amount in 1 given year, we've proven we can sell assets into a tighter yield environment.

And the second question, you talked about the opportunities and you talked about third-party capital. Can you just remind us what capacity you've got left in the existing joint venture? And is there the potential for additional capital into that joint venture or potentially other parties coming along and creating structures with you?

Yes, definitely. Thank you. So the Blue vehicle, we set an aspirational target of GBP 1 billion when we formed that vehicle. It's now at GBP 850 million or so. So there's still some capacity before we reach the GBP 1 billion. That isn't a hard cap by any stretch. But I think it's fair to say at a certain point, you would probably like to diversify funding sources and capital partners. So there is definitely still room to grow there. Blue Al is very much still in growth mode. So that's a very good partner for us. We're also having some early-stage conversations around potential for further joint ventures, what might fit quite neatly alongside the Blue A vehicle is if we had a core capital partner with a lower return and you're targeting that low risk, low return type opportunity set that might work quite neatly. We've also seen with interest, announced this week, Realty Income's JV with KKR and that looks like some pretty low cost of capital there. So we're very much open-minded. We've shown our ability to grow through JVs, through equity raising. It will just come down to wherever the numbers look best, and we are going to keep pushing on all fronts. Matt Norris from Gravis. Can you provide some commentary outlook on the dividend, dividend growth, dividend cover, how we should expect it to grow in the future, please?

Sure. Happy to take that one. So as we expected this year, dividend cover was 93%. And the reason we set out in terms of recycling the capital from the JV. We set out in March at the minimum uplift guidance for dividend is 2% per annum. And for us, the important part is it's sustainable. So we would expect to get back to that kind of sustainable dividend. 2% is the minimum target for us now. And we'd expect, as I said, sustainability is the key of the dividend. The next job for us, and what we've shown with the equity raise, is how can we drive that 2% on to eventually get back to parting for inflation that we're getting at the top line down into dividend growth. But the work that we've done over the last 18 months has got to a point where we can sustainably grow at 2%. As I said, the next job is to try and grow by more than inflation.