Supermarket Income REIT (LSE:SUPR) — Interim Results

0:00 Good afternoon, and welcome to the SUPERMARKET INCOME REIT PLC Interim Results Investor Presentation. Throughout this quarter presentation, investors will be in listen only mode. Questions are encouraged, they can be submitted at any time just by using the Q and A tab that's situated in the top right corner of your screen. Simply type in your questions and press send. The company may not be in a position to answer every question it receives in the meeting itself, however the company can review all the 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 Robert Abraham, fund

0:31 manager. Good afternoon to you, sir. Thank you, and good afternoon, everyone. Great to have so many of you dialing in. So this afternoon, we're gonna take you through the update following our interim results that were announced earlier this week. For those of you that have already watched the the presentation we gave to analysts earlier in the week, then we will we will try to bring in a bit more information. We can, obviously, go into a bit more detail in this forum than we than we typically would there. So and and as as noted, do fire away with questions in the q and a. We we should have plenty of time at the end to to to run through as many of those as possible. So as mentioned, I'm Rob Abraham, the fund manager on SUPERMARKET INCOME REIT for Escharato Capital.

1:17 I'm joined by Mike Perkins, who's the finance director, and we will come on to the internalization of what that means for for the structure going forwards. But I think just to just as a starting point, it's been a really busy period for for us and for SUPER. And, ultimately, we've had another period of strong operational performance, and that is supported by the resilient grocery sector. We, of course, got Tesco, Sainsbury's, and now also Carrefour. So in terms of investment grade tenants, it's around 79% of our income, and they've been performing very strongly during the period. So so that is ultimately good news for us. We've also made significant progress on the key strategic initiatives that we announced late last year. In November, there were a number of initiatives, and you will have seen in our more recent announcements the progress we've been making against those. And the most recent and most notable perhaps is the internalization that will leave us well positioned for future growth. So just to touch on where those kind of key strategic initiatives were set out, so cost reductions.

2:29 Now many of you would have have noted that we had announced in q four last year, the the change in the management fee. So that saving was around £2,000,000 per annum. Adding to that is the internalization with a further 4,000,000. So that allows us to have a target EPRA cost ratio below 9%, which would be one of the lowest in the sector. The next of our strategic initiatives has been around lease renewals, and this is just evidencing the higher affordable rents that we can achieve on the types of stores that SUPER owns, and those rents have been materially above, broader market indexes such as MSCI. We've also been actively capital recycling, so disposing of a tighter yielding asset and then deploying that capital into more accretive options.

3:18 And the last one on this page around strategic joint venture, and we continue to make progress there, which we will come on to later. But, ultimately, all of these activities are designed to drive earnings growth and enhance dividend cover. And the overarching goal there, of course, is to close the current discount to NAV. So on that note, I will hand over to Mike to take you through the numbers, and and then I will come back to walk through walk you through some of these initiatives in more detail. Great. Thank you, Rob. Good afternoon, everybody. I'm Mike Perkins. I'm the finance director here for SUPERMARKET and I'm gonna take you through the financial results for our interim period to 12/31/2024. So starting starting with the highlights, net rental income of £58,000,000, which is up 10% versus the prior periods.

4:09 We also reported an improved EPRA cost ratio of 13.6%, which is down 150 basis points. And the combination of those two results in net adjusted earnings of 3p, which is up 3% over the periods. And the balance sheet remains robust, got £1,800,000,000 portfolio valuation, which was a modest 0.5% like for like increase over the six months. And that results in net per NTA of 88p per share, and we have a pro form a loan to value of 38 percent when including post period end activity.

4:46 So looking at the income statement in greater detail, what we set out here is net rental income of £57,800,000, which, as I said, is up 10%. But really importantly, that gross to net margin remains extremely high at 99.4%. It's one of the highest in the sector, and that is really sort of borne out with 79% of our of our our tenants are investment grade in Tesco, Sainsbury's, and more recently Carrefour. Have a 100% occupancy, 100 rent collection. So it's just really important for us, and that feeds through into, as our rental income grows, we we lose very little of that gross revenue to say things like void void costs and and the like.

5:32 So let's go through the how we've achieved that growth in in in rental income. What we've set out here is is the passing rents of the portfolio. So starting on the left there, you can see a £113,100,000 passing rent at June 24. We made an acquisition of a Sainsbury's, superstore supermarket in Huddersfield, which contributed £3,900,000 to rent roll. And we completed 15 rent reviews over the period, which added a further £1,600,000, and those rent reviews are settled on average 3% ahead of the previous passing rents, giving the passing rental income of £118,500,000, at the period end. Over the six months, administrative expenses were broadly flat, marginally down at £7,500,000.

6:36 But as I mentioned, the cost ratio of 13.6% is a 150 basis points improvement over that six month period. And here, we just set out how we compare amongst our peer group. So it's this is a peer group of consisting of FTSE three fifty listed REITs. As you can see at 13.6%, SUPERMARKET already performs extremely well. But as Rob mentioned earlier, the internalization, if approved by shareholders, would give significant cost reductions, which allow us to target an EPRA cost ratio of sub 9%, which really would put us amongst the sector leaders in that regard. And we've been very busy, in sort of deploying capital over the periods into earnings enhancing acquisitions.

7:28 That has resulted in us taking loan to value from 33% at December 23 up to 38% where we are today. And the sort of corresponding impact to that is that the net finance expense has increased by by approximately 50% to £12,900,000, but purely as a result of of higher higher average drawn debt for the period. So bringing this all together, what we've set out here is is a chart, or a bridge in the adjusted earnings over the six months. So looking at starting at the column on the left, adjusted earnings at December 23 were £36,300,000.

8:11 The, increase in rent roll due to acquisitions, but also to organic growth through rent reviews, or uplifts from rent reviews captured in the period resulted in £5,200,000 of growth. As I mentioned, administrative costs were broadly flat in the period. We have been focused on negotiating contracts with third parties where we can, and there is a small improvement of approximately a £100,000 over the period. And then financing costs increasing by £4,200,000, plus I mentioned that the vast majority, even 70% of that, is attributable to that higher average drawn debt balance over the period as we've been deploying into into new acquisitions. And that results in adjusted earnings of £37,400,000,000 for the six months December 24, a 3% increase from the prior periods.

9:02 So turning to the balance sheet. Portfolio valuation of £1,830,000,000 is an increase of £57,000,000 since June 24, and that that is solely due to property acquisitions being made in that period. Per share, as I said, is 88p, which is up 1% over the six months, and loan to value at 38%.

9:29 So set out here is is a bridge of NTA over that six month period. Starting again on on the left hand side, June 24, you could see 87p per NTA. Adjusted earnings of 3p covering the dividends paid in the periods, which are also 3p per share. And that portfolio revaluation, which was, as I mentioned, a modest sort of 0.5% like for like increase, increased NTA by 0.7 p and resulting, as I said, 88p, HEPR NTA at the period end. And if you take that growth in HEPR NTA with dividends paid in the period, it gives a 4.1% total accounting return, and 85% of that has come from, realized income returns.

10:18 So looking at our debt stack, we have a very strong balance sheet. We have maintained our investment grade credit rating of triple b plus with Fitch. And you can see in this chart, we have a a diverse, maturity profile. The average maturity across our cities is three point seven years. We do have two facilities, maturing in FY twenty six for which we are currently exploring the possibility of terming that out that debts into bond issuances, or private placements. And we would look to continue to move or transition our debt stack from a secure secured lending platform to an unsecured lending platform. You can see 87% of our drawn debt today is currently unsecured, and that's an improvement from 60% at the same time last year.

11:08 93% of our debt drawn debt is fixed or hedged, and that's at an average cost of 4%. We are our first hedge rolls off in January 26 and the and the last one in July 27. There's a very even spread of maturities across that period. And over that point in time from now to when the the hedges roll off, you'll see that average debt cost incrementally increase as the strike rates and the hedges increase as well. And the loan to value of 38% is within our at the higher end of our 30 to 40%, target. But what we have seen in terms of valuations over the last two cycles is definitely a valuations have stabilized. We have plenty of significant headroom in the across all of our banking covenants, so we feel feel very comfortable at 38%, and it still give us gives us some firepower and flexibility to to continue to, execute our strategic initiatives.

12:07 With that, I'll hand you back to Rob. Thank you, Mike. So to to to then come back to the initiatives, the various initiatives we've we've made progress on, I'm gonna start with cost reductions and and internalization. And just for those of you that aren't familiar with with what we're talking to in on internalization, it is ultimately myself and Mike at the moment and the wider team that supports SUPERMARKET INCOME REIT are employed by TRATO Capital as an external adviser to to the fund. The fund then pays the management fee to a SUPERMARKET As part of this process, by internalizing the management, myself, Mike, and the broader SUPER team will become employees of Supermarket Income REIT. And for that, a termination fee is payable to a charter capital as manager.

12:56 But then just to then get into the the benefits of doing that, both for SUPER and also for shareholders, well, first of all, is material cost savings of at least £4,000,000 per annum. And as I mentioned earlier, that is on top of the saving that was being achieved through cutting the management fee, was announced late last year. So the total saving there is even greater than the four. So that's the kind of large financial driver, which means that that SUPR is able to have that EPRA cost ratio target, as Mike mentioned, of of below 9%, which is one of the lowest in the sector. With that, again, we get that greater balance sheet flexibility and optionality, including longer dated debt. So, again, as Mike was talking to, the ability to term out some debt because the lower cost base of the business gives us greater flexibility around that.

13:52 We also benefit from the increased alignment between the company, management, and shareholders. So there is that very clear alignment and incentivization of the team, to ensure that that everything is is in the best interest of shareholders. With that, we get a simplified structure, and we've been able to secure the specialist team. So the the core team that have been working on SUPR for some time, so there are 14 of us transitioning across. There will be a couple more hires. There will be a total headcount of about 17 to run the business. But we've secured that specialist team and the platform, the processes in a very efficient and collaborative tran transaction. The formal decision was made by the board at the start of February, and we should have completed the internalization by the end of this month. So as I say, very efficient process, and we've been able to retain all of the the core team and the knowledge and know how that that's the where the real value add is.

14:51 Now with that, also, there is a broader investor appeal. So the external model, particularly where we've been having conversations with investors from South Africa on the on the JSC or also in Europe or in The US. There is more of an aversion to external management. So by being internalized, we open the door to potential buyers and and greater liquidity in in SUPRASHares. And alongside that, you have the potential to change listing. And this is a slightly technical point, but as it stands, SUPRAS listed on among the investment trusts. And as part of having once you've internalized, you're able to change that listing to be a a commercial company, and that, again, opens up opens up SUPER to a wider investor base who are able to invest in in in SUPER as a a commercial company.

15:45 So a number of both financial and strategic benefits. And just to then look at that in the context of capital allocation. So the yield, if you think about it from a yield on cost perspective, so, the consideration paid was 19,700,000. There are some additional costs on top of that, some transaction costs, some transition rearrangements. But on a on a fully costed basis, that £4,000,000 a year of saving is equivalent to an a yield on the internalization of 19%. So there really isn't anywhere else that SUPER could deploy its capital to achieve that kind of return. So share buybacks would give you at the moment around 8%. The unlevered IRR on acquisitions is around 9%.

16:30 So, again, internalization clearly, the most accretive option for for deploying the capital.

16:40 So then just to come on to lease renewals. So we we've been able to evidence the higher affordable rents on the types of stores that SUPER owns, and this is something we've been talking to for some time. But this transaction just really allowed us to clearly evidence those higher rents by renewing the three shortest leases in the portfolio. So they were an average of six years and extended out to fifteen years and keeping that annual inflation links uplift. Now the the average reduction in rents was around 20%, but that is absolutely in line with our underwriting on these assets. So we that was is absolutely priced in, but the key key benchmarks here are 4% rent to turnover.

17:26 And, again, the point for us is rent per square foot is too blunt at all for analyzing rents in supermarkets because store size is very dramatically, trading performance varies dramatically. What the operator is willing to pay you is a percentage of the store's trading performance. So these these three lease three gears have evidence that 4% rent to turnover. And very importantly, they are at rents which are 35% above the MSCI SUPERMARKET CRV, and we get a lot of questions around overrentedness. And the number that is quoted is, well, the MSCI SUPERMARKET CRV. In this transaction, we've demonstrated that top performing omnichannel stores, the ones that make up SUPR's portfolio, will achieve higher rents, and also 13% above the value as ERV.

18:16 Now the reason for that is value is our ultimately, in our view, too conservative and kind of oversimplify the view of rent. So, again, very important that we demonstrate that that we're able to achieve those higher rents beyond where the value is also would have forecast. So why is it that these omnichannel stores can can achieve those higher affordable rents? Well, on the left hand side, something we we talk to a lot is the strong performance, particularly of Tesco's and Sainsbury's. And so the left hand side of the page here is Tesco's most recent results. You can see sales growth by channel, and you can see that large format stores, 4.2%. That's well ahead of convenience at naught point 5%.

19:01 And you might think that from from the way the kind of UK media coverage of grocery, the angle that they come from, that you might think convenience was the growth area. But, actually, you can see in the numbers that is not the case. And more than that, online at 9.3%. And the reason there's a gold box around both of those bars is because omnichannel stores fulfill both of those channels. So on the right hand side, when you translate that into actual trading performance at the asset level for SUPER, this is an example of a store in SUPER's portfolio where we get the actual trading data from the operator, and you can see that the rental growth hitting its cap there at 4% on the annual inflation in top lift, while turnover is growing at 4.9%.

19:49 So that just means that the rental growth that we're achieving on that store is sustainable because you're seeing the turnovers grow ahead of

19:56 those rents. So really positive for us, but just evidencing why the types of stores we own, omnichannel top performing stores, are able to command those higher rents and also why they remain sustainable.

20:12 So now on to capital recycling. So what we've been able to achieve through capital recycling is selling assets above book value, and that supports the portfolio valuation. It's evidencing, that there is liquidity at where we have assets marked, but not only that, also beyond where we have them marked in our own books.

20:33 We're then able to redeploy that capital to in our enhanced earnings. Now some of that some of that is in, as I mentioned earlier, been allocated to funding the cost of internalization, but also we keep all options on the table, whether that's share buybacks, more store acquisitions. They're certainly very much under consideration. And as we're recycling that capital, we're we're we're still able to maintain that robust tenant credit strength with an absolute focus on quality. So just to take you through an example of of an asset disposed of here, this is Tesco Newmarket, which was sold at 63,500,000. That's a 5.2% net initial yield, and this just highlights and that's a 5.2% on a on a property transaction.

21:22 This highlights the critical

21:24 nature of omnichannel stores to the operators, The fact that Tesco is spending over £60,000,000 buying back in one of these stores that fits the profile of the wider portfolio shows you how the operators are thinking about the future of these large format omnichannel stores in terms of the strategic importance to them. We sold at 7.4 percent premium to book value. So, again, just really proving portfolio valuations there. And then as I've mentioned, it just provides that optionality around redeployment.

22:00 So then on on the other side on acquisitions, we've been able to enhance earnings. So examples on this page, Sainsbury's Huddersfield at a 7.6% net initial yield, very attractive yield. That's because it is a bit over rented, but certainly, the market perception of over rentedness is is well over baked in our view, and this comes back to us, our store level underwriting acquisition. But that means it's accretive to the cost of debt, but we're maintaining that quality with an investment grade tenant and it it being a large omnichannel hub. It ticks all the boxes for us. Looking to the car four portfolio. So this was the second tranche sale and leaseback that we did. So nine stores acquired at a 6.8% net initial yield. Now you can see on this page 40,000 square foot.

22:49 And the difference, of course, in France is you have hypermarkets, which are more like 200,000 square foot. Now that is where consumer behavior is changing, and you're seeing performance begin to suffer, which is why we focused on those kind of neighborhood right sized types right sized stores, that trade very well. We've got three years of trading performance data, so we've been able to diligence and select good performing stores. Also provides that attractive spread to the cost of debt because the cost of debt in euros is cheaper, and we funded that through a seven year private placement of 4.1%.

23:26 So locking in that spread of 2.1% to the cost of debt. But, again, Carrefour ticks all the same boxes. Investment grade tenant with a dominant market share. It's got 21% in France. And, again, these are omnichannel stores, but the difference in France is that online is fulfilled through click and collect rather than home delivery as it is in The UK.

23:50 So of the last of our strategic initiatives was joint ventures, and this provides further strategic benefits, but it does does share benefits with the single store disposal. It, again, supports the portfolio valuation. It also provides the financial flexibility in, providing capital that we can recycle. It reduces the LTV in the near term, of course, but then we're able to redeploy that capital in the most accretive manner.

24:21 It also demonstrates our ability to scale SUPER through third party capital, which is in the absence of raising in the equity markets at the moment. Clearly, with SUPER trading at a discount, we wouldn't be raising at these levels. So being able to scale and grow the platform with a credible third party, which supports SUPER's investment thesis is is a is a really, really strong message. We also and this is another benefit of having an internalized structure is that management fee generated through through a joint venture will now all flow to SUPERMARK, and it means we're able to leverage the team and the expertise to drive drive earnings, which is which is a real benefit.

25:07 And finally, the structure of a joint venture would be seeding it through assets that SUPER already owns. Now that keeps the structure simpler, but it also means we can retain long term we can retain an ownership interest in those in those assets, which may, in future, then provide a a pipeline longer term. So just turning to the investment market. So what you can see on this page is supermarket investment yields as provided by MSCI compared with the all property in gray. Now MSCI Supermarkets at 6.3%, you can see, have reached the peak that we last saw in the global financial crisis. Now, clearly, the path to lower interest rates is going to be much slower than it was in the GFC where you saw the the kind of rapid rate reductions.

26:00 But, actually, what it means is that we're we're confident we've seen the peak in yields, and they will the direction of travel will be lower, but it it it just may might might be a bit slower given that interest rates are coming down slower. You can also see there the orange dot 6% SUPER's net initial yield. The reason it is inside that of the MSCI Supermarkets yield is, of course, the quality of the assets that SUPER owns. But you can also see there versus all property at 5%, the supermarkets provide a yield, which is very attractive in that more of your return is weighted towards income, and that means you just got much greater certainty and visibility around it.

26:47 And those supermarket yields are supported by actual transaction data. So we've got Sainsbury's Vantage on the left hand side here. That was acquired by a local government pension scheme at a 4.6% net initial yield with the lease being re geared there back to twenty five years, and that was at a rent per square foot of about £28 starting rent, again, in line with that 4% rent to turnover. So just tells you something about how the operators are thinking about affordable rents with that being linked to to annual inflation reviews.

27:20 Sainsbury's Halifax in the middle there acquired by ICG, fourteen year lease term, but it is a bit over rented, so that's why it's at a yield of 6.1%. And then Tesco Congleton with seven years remaining acquired at a 7% net initial yield. So, again, Tesco Active. So it's this competition for assets, that gives us confidence that we've seen we've seen valuations find find a floor, and, actually, there should be upwards pressure now on those valuations.

27:50 But why do we see this competition for us? It's continuing. Well, if you look at SUPER's investment case, you can see why. Firstly, we're in a inherently defensive sector, which is resilient throughout economic cycles. We've got highly secure income with 79% of that for SUPER coming from investment grade tenants.

28:12 We also get excellent visibility of that income with a twelve year average lease length, and 81% of that income is contractual has contractual inflation linked rent reviews. So, again, just provides that really good visibility.

28:29 The assets are also future proofed, acting as a last mile omnichannel fulfillment hubs. And and as you as I showed you in the earlier slide, it's those growing store revenues that provides for sustainable rental growth. So just in summary, we think we believe SUPER's well positioned for future growth. We've got the resilient and highly attractive grocery sector with tenants performing very strongly. Our focus is absolutely on enhancing earnings and closing the discount to NTA. And for that, we're targeting further progress on our strategic initiatives in the near term. So looking at those areas of focus, firstly, is to deliver the internalization, which subject to shareholder approval at the vote next week, we would be aiming to complete by the March 25.

29:25 And thereafter, we'd be looking to pursue the change of listing as soon as possible. We're also continuing to progress those discussions on a strategic joint venture. And in realizing any proceeds of of asset disposals, we will be reviewing all capital allocation options. And I mentioned earlier, that's across share buybacks, store acquisitions, debt repayment. It will it will come down to the relative merits of those as and when the proceeds are realized. And then lastly, just looking to refinance debt and extend out the maturity of that and more closely match the the term of the debt to to the term of the leases. So that concludes the the presentation.

30:10 We will now we will now move across to to questions. And given I've been doing some some talking, Mike, I think there was one for you here. Assuming longer term market interest rates stay around current levels, is the current dividend sustainable if SUPERMARKET to refinance at levels much higher than the current 4% average? So worth talking to the kind of hedging profile there as well, mate. Yeah. Yeah. Absolutely. There there are quite a few questions in in the chat around, what our prospective cost of debt is as our hedges roll off. So perhaps if I talk to a few different areas, it should cover off a, hopefully, a few different questions. So so taking this first one in hand, clearly, obviously, I can't give a forecast going forward, but what I can say is that the initiatives that that we've spoken to today, are all designed to improve earnings and therefore dividend cover.

31:01 Clearly, the internalization, the cost savings that we've highlighted of, £4,000,000 over and above the £2,000,000 savings already stated based on the market cap base fee will clearly help that earnings growth going forward. Now in terms of other levers that we have to pull, we can do capital recycling as we've shown here demonstrates that we can sell assets at 5.2% and acquire them at attractive yields, say, 7% plus in The UK and a 6.8% in France. So we are able to sort of, get that, arbitrage by sort of recycling out to lower yielding and into high yielding assets. In terms of interest rates on a look forward basis, as I said, we have we are sort of 93% of our drawn debt stays fixed or hedged.

31:50 Now those those hedges will mature from January 26 to July 27. Our sort of the way we we model interest rates is that we look to the forward implied interest rate curve. If you look at that kind of implied base rate once our hedges roll off, it would it would show an interest rate of about 3.8%. We delivered our most recent financing at about 1.5% margin over the base rate. So allowing for fees on top of that, we would we'd probably be expecting our our sort of medium term interest cost to be about 5.75% in that sort of range. But, actually, interestingly enough, where where credit spreads are on on, say, a bond issuance, we would we'd be able to do a five year sterling issuance at around 5.4%, seven years at around 5.5.

32:45 So we we think that at those sorts of levels, the and the initiatives that we've spoken to, the you know, they're all designed to improve earnings and improve that dividend cover with the ultimate goal of being to grow dividends more in line with the inflation that we're capturing on our on our on our leases. And and and just on that, because one of the questions was kinda correctly pointing out that in September last year, we were talking to that prospective cost of debt might be more like 5.3% Yes. Rather than the 5.7 or so today. But as Mike says, looking at those cost savings across both the internalization and the management fee cut, you're looking at north of £6,000,000 a year of cost saving, which, of course, then offsets that higher cost of debt. So that's been the the driver of those moves, and it does give us, as we've said, that much greater flexibility around financing.

33:40 Mike, another one, maybe if you actually what impact does the internalization have on the REIT status? Yep. Fine. So so in short, there there isn't an impact on our REIT status as a result of that change in in chaps listing. Now, clearly, we wouldn't do anything that would put into jeopardy our ability to maintain our REIT status given the the sort of favorable tax benefits that it gives to our shareholders. So, yeah, clearly, we wouldn't do anything to to to put us in breach of the REIT rules. So a a couple of questions around the overrenting piece. So what firstly, what do you mean overrented? So this is where a lease potentially through, in some cases, the these leases had twenty years of inflation linked up lifts. In some cases, the rent was set too high day one. In others, the just the the rent has grown with inflation quicker than the store trading performance has.

34:35 So the two are slightly out of step. Now for us, there's just really good value in those assets. So what it means is that investors are looking to those and saying, right. If my rent today is up here, it's gonna reset to down here. Now our value add actually is that the rent that the stores reset to is higher than the rest of the market thinks. And in our in our lease renewals, we've proven that to be the case. So, yes, there was a rent reduction of 20% on those stores because they were over rented. Now the point is the market is, as I say, kind of over baking that fear of over rentedness. So the rents came down 20%, but that was still 35% above the MSCI rents, which is where the market viewed those leases coming down to. And what that means is actually from a valuations perspective, it has a positive impact because the rent you are resetting to is above where the valuer had expected them to.

35:32 But that isn't to say the portfolio on the whole is over rented. So as a whole, it is broadly rent rented. Our portfolio average rent to turnover is 4%. The portfolio average rent per square foot is £24. So on both of those measures, broadly wrap rented, but, of course, that is an average. We have some stores that are over that level, but that to us is just really good value. If I can buy, for instance, Sainsbury's Huddersfield at a 7.6% net initial yield, well, actually, that is just a really attractive income from an investment grade tenant. And provided I model in the expiry of the lease, there will be a reset to the correct affordable level, I e 4% of turnover, then it's built into my underwriting and my returns, and I can achieve a really quite attractive IRR because the rest of the market is mispricing the the degree of overintimate. So that's where we see the value in those assets.

36:32 There's a there's a question here on dividend payout ratio, net per cost ratio, but so perhaps I can can talk to those. So, why are we targeting aggressive dividend payout policy with zero earnings retention? Would the board consider a more prudent policy, I e, 80% of AFFO payouts? So I guess, firstly, what I would say is that as a REIT, we we are required to pay out 90% of our property rental income. And, clearly, we're sort of aligning ourselves so that our our earnings at group level broadly match those that are required under a REIT, in terms of our property rental income. So at a minimum, we'd be looking the our our minimum would would be, say, that 90% mandatory requirements to maintain our REIT status.

37:22 And at the moment, yeah, as I said, we are paying out approximately a 100% of our of our of our earnings. Dividend cover was one times covered last year. Our earnings for the half year were three p and dividends paid with three p. So we are we are broadly paying out a 100% of our of our income. Now go back to everything that we're doing at the moment from a strategic level is is to therefore to drive that earnings growth, the cost reductions that should hopefully feed through into that ultimate goal of sort of growing earnings and have trying to get back to say a dividend cover of 1.1 times, which would allow for some for some retained earnings on the way through. But at the as it at the moment, yeah, it wouldn't be 80% AFFO because that clearly, we wouldn't do anything to jeopardize our REIT status.

38:16 Then is is the EPRA cost ratio excluding financing costs? Yes. That's correct. It does exclude financing costs. So what that will include is the any costs associated with property operating expenditure, so service charge shortfalls, void costs, but also the administrative cost of the business, and it takes those as a as a percentage of gross rental income. Good. Thank you, Mike. This one here just around how much is the termination fee on the internalization. So you'll see in the announcements that was 19,700,000, which is the yeah. The these contracts have kinda notice periods in. But, actually, if you look at it from the perspective of a payback period, it's around five years.

39:05 But, actually, we've been quite conservative in those cost estimates. And and, yeah, I think if you look at it from a return on capital perspective, it's just incredibly good value for SUPER in in doing that. I did see a question on energy efficiency of stores, and is there any work required, I. E, cost for SUPER? Have we looked at fitting solar panels or or EV car charging? So the point there is we're really fortunate in the grocery sector, of course, that our tenants are very much committed to sustainability. So they are the ones who make significant investments in the stores, whether that's removing gas power, upgrading to energy efficient refrigeration, lighting.

39:55 So, actually, the cost is very much borne by the tenant. It's the benefit of being in mission critical real estate that the the tenants have to invest in their stores. But, also, if you think about it from the perspective of energy consumption, these tenants are some of the largest consumers of energy in the country, so they're very much incentivized to improve energy performance. Now that said, the large part of our business is triple net leases where the tenants do those works, where we have your larger kind of grocery anchored retail parks where we have greater control. We have been rolling out EV charging ourselves, looking at whether we can do rooftop solar. Now the point there is it's that's great for the environment, and it's enhances our kind of ESG credentials, but you shouldn't think of that as kind of a material economic benefit in the context of a £1,800,000,000 portfolio earning kind of a a couple of £100,000 from EV charging each year doesn't massively move the needle, but we think it's really important, as I say, for our for our ESG credentials to demonstrate our own commitment to sustainability when when ultimately so much of it is led by the tenants.

41:16 I'll take the next one just on RPI rental uplifts being capped at 4%. And is there an ability for those to catch up in a year where you have more than 4%? So in short, no. The caps apply annually typically. Now the way to think about that, though, is in a in a in what would be a more normalized environment, you capture typically, you will capture all of the inflation. What it does mean is that in in periods where, as we saw in recent years, a year where you have kind of ten, twelve percent, what it means is that your rental growth remains sustainable. If you were seeing kind of 12% up rental uplift come through and thereafter kind of 4% compounding uplifts each year, you can see how the rents might quite quickly run ahead of the affordable level for the store. So we're absolutely focused on that 4% rent to turnover.

42:09 So in short, yes, we do lose that kind of excess, but, actually, we think it's a positive in that we're capturing a kind of sustainable level of growth coming through the leases. George, should I take the next one on in regarding cost of redeploying capital? I e, so the yeah. So, obviously, the the sale of Tesco, as we said, was was done at a 7.4% premium to the June valuation. So, clearly, that is a that is a good result for us. What would the cost be to buy a different store? Well, typically, if we're in The UK and it was an asset acquisition, you'd allow for about 6.8% purchaser costs on top of the purchase price. But that does that will vary, and it will depend on whether it's an asset purchase or whether it's a corporate acquisition.

43:00 For example, that the acquisition in Huddersfield, we acquired a corporate where, obviously, the the stamp rather than being 5% is is more like half a percent. So it will vary, and it will depend whether it's an asset or a or corporate acquisition. But, clearly, if we are able to sell a 5.2% initial yield and acquire it, you know, 7%, then clearly, that is earnings enhancer for us. And, of course, alongside that, we consider share buybacks, which has lower cost attached to it. So, look, I think what we can say is that as and when we realize more capital, we'll be consider considering all options. There is a there's a couple of questions here just about the the discount to NAV, what's driving it.

43:46 So I think look. As I said, our our initiatives that we announced in November last year have all been designed to address the discount ultimately. And and what we mean there is growing earnings, improving long term dividend cover, but then also answering some of the investor questions and concerns around degrees of overrentedness. So doing those lease renewals, putting through the cost reductions that ensure we can cover the dividend and and in time, grow it more in line with our the rental growth in the leases, that is all designed to close that discount. And since we announced the internalization, we've had some positive share price momentum. I'm hoping that we will be able to continue that as we deliver further on those strategic initiatives. So there's another question here about, the debt profile, and have you modeled dividend versus, rent. I think we've we've probably covered that in some detail. But, yeah, look, as I said, clearly, all of our modeling that we do is is based on that sort of forward implied interest rates, and that's kind of taken into account when we're looking at any capital deployment. And and absolutely, it's what we said is that at that sort of medium term interest rate cost, we believe we can deliver that sort of growing sustainable dividend into the in today's market rates of interest.

45:10 There there's a question here around so some of our peers were able to enter into long dated cheap debt in in a couple of years ago. Why didn't SUPER do this? So the point there was we actually we've got a credit rating. We're still triple b plus credit rated. When we got that rating, we then began working on a process for a bond issue that's as we were kind of in the final stages, we had a presentation prepared, and we're about to launch a roadshow. Russia invaded Ukraine, and clearly markets became a lot more volatile and just never really recovered. So we've gone from looking at kind of seven ten year money at 2.7% or so to to suddenly that being 5% plus, and the market's never really settled. So this comes back to our point of it. It's still absolutely our ambition to to to issue that longer dated debt.

46:05 And through the cost savings we've achieved and the growth in the platform, actually, that becomes viable once again. So it's very much on the agenda because, yeah, our plan was always to match more closely our lease profile with the the the term of the debt. There there's a few questions in here, Rob, just on the JV. Yes. Yes. So so, yeah, it won't just just around, firstly, cost base. So look. No. The the benefit of a JV is you don't materially increase your cost base. So you're able to leverage the expertise in the business and the team to generate earnings when we can't when we otherwise would be perhaps looking to raise capital through equity markets.

46:53 We can do it through a joint venture and get and and and generate earnings through management fee income for SUPER. So so that's a real benefit. The internalization isn't a requirement of JV partners, but what it means is that under the external model, some of those economics in the management fee would have flowed potentially to the external manager. So this allows SUPER to capture all of it. In terms of our criteria for for potential JV partners, really, there are many, many institutional investors out there with appetite for supermarkets as as you've seen through some of the slides today. But, actually, it's about a partner with the right time horizon with the right strategy. Really, what we're looking at is kind of a credible third party institution with a a depth of experience in real estate.

47:47 So so, yeah, watch this space. In terms of timing, clearly, being in the presentation at the moment, it's something we're we're actively working on. And and I would hope that in the reasonably near future, we might be able to give give some more detail on what that looks like. And there's one there about the 19% of leases without RPI, without inflation linkage. These are these are open market reviews, so they review on a five yearly basis. Now we've seen through the periods of high inflation and significant revenue growth for the operators that affordable rent affordability has improved. So it's absolutely one of our priorities for this year is kind of educating the the real estate market on that affordable rental growth and looking to push through some rental growth on a on an open market basis away from those contractual inflation linked up uplifts.

48:53 Yeah. Why don't I just take the point on there's a question here around the move into Europe and how the markets are different. So, look, I think there is a there's still a pipeline of assets in The UK. There is competition, but we we still have been able to, over the years, continue to grow in The UK. Now that supply is ultimately finite, of course, because Sainsbury's and Tesco are actually buying stores back rather than doing new sale and leasebacks. But but the move into France is because, actually, we want to diversify the portfolio. If we were to do that in The UK, that would be with Astor and Morrisons. We do not want to materially increase our exposure to those names given the private equity buyouts have meant that, actually, those covenants have weakened. So whilst we analyze stores on a kind of micro performance level, our focus is very much on the leading investment grade operators.

49:48 Carrefour ticks all those same boxes, 21 mark percent market share in France, triple b investment grade credit rating. So it ticks the boxes. The difference, as I mentioned earlier, is your your grocery market in France, certainly for online. Click and collect is 80% of online versus The UK, which is 80% home delivery. So it's very much the opposite. You've got neighborhood type stores. In France, there is ultimately, there's a a lower population density, which means there is more grocery floor space, which means it's a lower margin business and particularly in their hypermarkets. So that is why we are focused on the right sized stores, but also ensuring that the rents are set relative to that lower margin.

50:33 So in simple terms, the rent is three times covered by the store level EBITDA margin. That is exactly the same as we achieve in The UK. So that's how we kinda contextualize those rents. But for us, it's a it's an attractive way to grow and scale the business and diversify the portfolio without materially weakening the covenant profile. We've only got 5% of the portfolio in that at the moment, so we've probably got some scope to do a bit more. But other than that, it's not a full pivot in strategy. We still have the growth avenue in The UK. And in the kinda near to medium term, I wouldn't really see us going beyond, say, 10% of the portfolio in in France or or Europe. There there's a question on on on our on our warts and how do we see us evolving.

51:23 Perhaps if I start with the warts at twelve years, obviously, that that is an average, and that and there's a well spread diversified maturity profile across of our leases. After we've done or successfully did the regears of the threes, which were our three shortest supermarket leases, our next material, lease expiry is not for another seven years. So at twelve years, we've got very good income visibility throughout. You know, it's something that when I have discussions with our our lending banks, they they very much like that sort of long long walks gives that income security. But more importantly, it's, you know, it's it's 80% investment grade covenants in the form of Tesco, Sainsbury's, Carrefour.

52:11 How do we see that maturing or or changing, evolving? Clearly, as as we regear those stores back out to fifteen years, that will obviously have a positive impact on on the walls. But we have been you know, the attraction for us and the opportunity set has been these sort of shorter sort of around ten year leases, where the the the rents have moved slightly ahead of market rent, but we see really good opportunity in those, and they're very attractive from a returns profile. So, you may see that trickle down a little bit over the next few years. But, obviously, as we regear those leases, it will push it out and increase that wall profile. There was a question just around alignment. So one of the real benefits of the internalization is that very clear alignment. So the joint venture is a great example of that that SUPER is able to capture all of those economics. There will be a management fee, potentially kind of promote some upside there.

53:16 In terms of incentivization of the team, myself, Mike, and the broader business, the the targets we will be set and our performance based compensation will absolutely be aligned to shareholders. It will be around kind of performance relative to the sector, around growing earnings, and and targeting that return for shareholders. So, yeah, look, I I think there is there is further detail on that to come, but you can be assured that, absolutely, it's a a real focus of it is ensuring that there is that very clear alignment, which the market sometimes questions when you have that external structure. By having that internal structure, it's it's much more simplified. There's a question here on on share buybacks at current yield. Would that have made not made more sense than than buying lower yielding French supermarkets?

54:06 I think where our share price is today, the dividend yield is about 8%. We can still see sort of long term IRRs on on our asset acquisitions of circa 9%, 10% on Gears. So, clearly, there is, you know, still attractiveness of acquiring assets. The the French assets in particular, as Rob mentioned, we were able to lock into that much lower cost of debt. So we financed our most recent acquisition of 4.1% relative to a 6.8% initial yield. Now, clearly, that is an initial yield that's day one, and then those rents will grow with inflation over time. So you'll be able to get the benefit of that increased rental growth over the over the duration of the lease. But what we, you know, what we continually talk to with the board is is that capital allocation point.

54:53 And as and when we realize capital, we will look at the most accretive, deployment of that capital proceeds, be it into debt repayment, share buybacks or further asset acquisitions, and we will take the most accretive position that gives delivers most the greatest shareholder value at that point in time. So, certainly, as when we realize capital in the future, yeah, that everything will be considered at the time. I I will just there's a there's a final few set of questions. I'll just wrap those up because we're running out of time as well. It with just around tenants buying back stores. So, look, I think we're seeing the tenants in very good financial health. The benefit of that really strong performance from them is that they're throwing off cash. Some of that cash gets allocated to share buybacks, debt repayment.

55:42 It gets allocated to CapEx. They spend a significant amount on upgrading their stores, but also some of that capital goes to buying back stores. We've seen them be participate in the market alongside us for a number of years. That isn't to say they buy back every good store, but they they, yeah, they have to they have competing demands for capital, and they have to take it to their board and get the approval, and that isn't always forthcoming. So we're still able to acquire some of their best stores. But but, yeah, we do see them ultimately as competition, and it does mean that over time, each time they buy back a store back onto their balance sheet, chances are it's gone for good. So it's a limited time opportunity. Brilliant. I think I think that's that's all the questions, but thank you very much for the engagement.

56:29 Thank you for so many of you to to joining joining us. Robert, Michael, thank you very much for 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 the management team can better understand your views and expectations? This will then take a few moments to complete and should 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. Thank you.