Supermarket Income REIT: A future-proof investment

Shareholders have already been handsomely rewarded with an 8% return in the first year, and an experienced team tell Lee Wild why this young trust offers very long-term secure income.

Please give a snapshot of Supermarket Income REIT

Steve Windsor, Principal, Atrato Capital: Supermarket Income REIT is the only UK specialist REIT investing in the supermarket property sector.  

We have a portfolio of about £300 million worth of supermarket property and that's located across the UK.

We raised £100 million in our IPO and we did two follow-on equity raises, raising a further £85 million.   

What is the strategy for Supermarket Income REIT

Ben Green Principal, Atrato Capital: We typically look for three key features in our investments.  The first is that they fulfil online grocery, we call those omni-channel stores.  The second is that they're top performing stores, and the third is that they're on large, flexible sites.

Steve Windsor: An omni-channel supermarket is one whereby the customer can go and shop in person in a physical store, but it also fulfils online. That could be online home delivery or click-and-collect.  We're big believers in online growth within the grocery industry, and so we want to invest in that omni-channel store because we believe it's a future-proof investment in terms of how grocery will develop over time.

Ben Green: We're the only team in the market who have a database of all of the leased supermarkets in the UK, and within that we know which ones are the omni-channel supermarkets which will benefit from the growth in online.

You recently announced your maiden set of financial results. What were the key highlights? 

Steve Windsor: We were very pleased to have delivered an 8% total shareholder return in our first year made up of the 5.5p dividend and 2.5% worth of share price growth.

If you look at our portfolio now, we have a very long average unexpired lease term of 19 years.  The portfolio experienced an average rental uplift in the first year of 3.6%, so strong rental growth.  That gave us the ability to announce a dividend increase as from January's payment, and we've put the dividend up in line with RPI, as the RPI link which is feed-through.

What experience does the team have of running this strategy?

Steve Windsor: The management team is very experienced within the supermarket real estate sector.  We have close relationships and tremendous insights into the operators themselves, and Ben has over 20 years' experience and has completed over £4 billion worth of supermarket sale and leaseback transactions.

Ben Green: The broader team is extremely well-connected with the operators and, as a result, we have great knowledge of their strategy and also the store network.

How sustainable is a 5.5% dividend yield in this property market? 

Steve Windsor: Currently our supermarket assets are very attractively priced and we only buy supermarkets with very strong tenants on very long leases and with RPI uplifts within that lease agreement.  That means we're very confident about the sustainability of our dividend at 5.5p, so much so that we've actually just announced an increase in that dividend as of January next year in line with RPI.

Are you worried about the threat of retail disruptors to the big supermarket chains? 

Steve Windsor: To get an idea for the future model of grocery, you only have to look at what Amazon are up to in the US and what Alibaba are up to in Asia.  There is a global convergence on the future model of grocery.  Amazon bought Whole Food and now have an omni-channel focus to their grocery distribution, and Hema are rolling out 2,000 omni-channel grocery stores in China.

This global convergence on the omni-channel model gives us a great degree of comfort that we are buying future-proof stores when we invest in these omni-channel stores here in the UK.

How has your trust performed since IPO last year and are you satisfied?  

Steve Windsor: We're very pleased to be able to deliver an 8% total shareholder return within our first year, and also equally pleased to be able to announce a dividend increase as of our January payment, in line with RPI, due to the linkage to inflation in our leases.

What is your property market outlook? Is Brexit an issue? 

Ben Green: The uncertainty around Brexit is going to be unhelpful to the broader property market.  When you add to that the continued disruption of online in non-food, there are going to be continued shockwaves through the property market.  However, we are very focused on a non-cyclical, non-discretionary sector, which is grocery, and we benefit from long leases to extremely strong tenants.

What type of investor should buy your trust?

Steve Windsor: Investors in Supermarket Income REIT are typically attracted by the very long-term secure income it offers.  We paid a 5.5 pence dividend, so 5.5% dividend for IPO investors in our first year.  It's very difficult to find that level of income without taking more risk in other asset classes.

On top of that, we have the potential for capital upside, given the large flexible sites we own, and that inflation linkage embedded in all of our leases means that we have a progressive dividend, which we expect to grow with RPI over the life of the leases.

This interview was recorded on 28 September 2018 and can be viewed in full here.