Supermarket Income REIT (LSE:SUPR) Q2 2026 Earnings Call

0:01 Good morning everyone and welcome to Super's interim results to the 31st December 2025. So I'm going to start us off with a strategic overview and then I'll hand you over to Mike to take you through the numbers. So it's been an incredibly busy period for us with significant levels of activity as we delivered on our strategy to grow earnings. And shareholders are now seeing the benefits of this. as we're increasing the minimum dividend uplift to 2% from the next financial year onwards. And we're positioned for further growth with an attractive near-term pipeline of over 500 million. Just to take you through some of the proactive steps we've taken over the last year to create a platform for growth.

0:54 We've achieved much greater shareholder alignment through the internalisation of the management. and shortly after that we completed the joint venture which has allowed us to undertake capital recycling and also generate management fee income and during the period we scaled that to 845 million demonstrating our access to capital alongside the debut bond issue that Michael will talk to in a moment we've established a cost efficient and scalable platform evidenced by our 9.2% EPRA cost ratio and this continues to trend lower as we look to grow the business and to support this future growth we've also been making investment hires so just to take you through a couple of the more recent names that bring a depth of grocery property expertise Jamie Cowan who joins us as strategy director with 30 years of experience in real estate the majority of which has been with Sainsbury's as a director of estates and investment and also Justin Upton as head of investment who most recently was CIO at Urban Logistics REIT and also prior experience as a fund manager investing in a portfolio that also included supermarkets and grocery anchored retail parks So we've doubled down on our sector specialism and now have a team, a dedicated team of 18 across investment, asset management, finance and investor relations.

2:27 And it's the sector specialism that allows us to underwrite opportunities for growth across grocery real estate. And in the left hand columns there, you've got UK food stores across the range of both formats and grocers, but also It's about investing in mission-critical top performing food stores for us and sometimes that comes with adjacent retail and we absolutely have the in-house capabilities not only to manage that but also to maximize the returns and then lastly the column on the right there our European exposure and we've taken France to scale now with our latest tranche of saying at least back with Carrefour and then lastly along the bottom of the page there you've got some of the the grocers that we see opportunities to work with going forwards and with these plans to grow we have ambitions to double the size of the portfolio but all the while maintaining those attractive investment fundamentals such as 90% or so grocery income long leases on average of around 12 years and of which around 80% is inflation linked and always maintaining that high quality of income with around 70% being investment grade and what we've shown at the bottom of the page is an illustration of the evolution of the portfolio as we double in size and you'll see that the core driver of the business is still UK food stores but with an allocation as we already do to

3:57 grocery anchored retail to European food stores and then lastly you'll see the new addition there grocery distribution now what we're saying here is that it will be opportunity led and it will come down to where we can best allocate capital to deliver returns but we've got the team the expertise and the relationships to be able to underwrite anything in the grocery property investment universe so with that I'll hand you over to Mike Thank you and good morning everybody. As Rob said, it's been an exceptionally busy period for the company. We've delivered a number of important strategic milestones, each designed to position the business for growth and create long-term value for our shareholders.

4:46 As anticipated, these proactive steps have had a short-term impact on H1 earnings, however they have significantly strengthened the foundations of the business and our ability to deliver sustainable returns. So turning now to the headlines of the period, which we'll explore in more detail shortly. Net rental income was £57 million, down 2%. Our EPR cost ratio improved to 9.2%, a reduction of 440 basis points. We paid dividends of 3.1 pence, up 1% on the prior period. The portfolio, including post-period end activity, increased to £2 billion, up 20% since June 25. Our EPR NTA was marginally higher at 87.5 pence and taken together with dividends paid in the period we delivered a 4% total accounting return for the first half.

5:40 Net Rental Income reduced by 2% in the period which was in line with our expectations. This was largely driven by the timing gap between receiving the JV proceeds which were completed in May 25 and the subsequent redeployment. Operationally performance remained very strong. On the left hand side of this chart you'll see we've completed 19 rent reviews, achieving an average uplift of 3.8x transferred into the joint venture, and as Rob said earlier, the JV proceeds have now been fully redeployed with the financial benefit expected to come through for FY27 onwards. We continue to have a highly secure and efficient income profile, another period of 100% occupancy and rent collection, 76% of our portfolio is investment grade, providing strong visibility and security, and our gross to net rent ratio of 99.5% is among the highest in the sector.

6:36 To turn into our administrative costs, we've made very good progress so far and delivered over £2 million of cost savings in the first half. As the chart shows, our epic cost ratio of 9.2% now places us firmly at the low end of the peer group. As I mentioned previously, we are still working through a small number of transitional costs following the internalisation, however we remain on track to reduce the cost ratio to below 9% for FY27. So bringing these elements together, EPRA earnings per share were 2.7 pence compared with 3 pence in the prior period. The main drivers were as follows. Firstly, and as I set out earlier, the transfer of assets into the joint venture, reduced earnings by 0.2 pence.

7:25 Management fee income from the JV, alongside £2 million of cost savings, increased earnings by 0.3 pence, which has fully offset the increase in debt cost, further to our proactive decision to refinance and extend the term of our debt. And finally, 0.1 pence reduction from a general increase in weighted average drawn debt compared with the prior period. So turning to our portfolio which has increased by 20% since June 25. On the left hand side of the chart you will see we have deployed £398 million of capital at a 6.5% net initial yield. The portfolio delivered a revaluation uplift of £7 million, or 1.3% on a like-for-like basis, outperforming the MSCI All Property Capital Growth Index by 90 basis points.

8:18 The movements post period end reflect the agreement with Blue Owl to transfer five of our assets into the joint venture and the deployment of a further £9 million of capital. Altogether this results in a combined portfolio value of £2 billion. The chart here illustrates the movement in EPRA NTA per share which increased to 87.5 pence up from 87.1 pence at June 25 Starting with the bar on the left EPRA earnings were 2.7 pence We paid dividends of 3.1 pence during the period The portfolio delivered a 2 pence uplift on a like-for-like basis which was partially offset by acquisition related costs The total accounting return for the period was 4% driven primarily by income which represented approximately 88% of the return and is underpinned by a portfolio predominantly of investment grade occupiers.

9:18 We have also been very active in the debt capital markets and we continue to manage our structure extending the average maturity and further diversifying our funding sources. The chart on the left shows our maturity profile We have only one drawn facility maturing in the next 12 months, which we expect to refinance imminently. Of the debt that's maturing in FY28, £284 million benefits from extension options out to FY30. Our debut bonds and US private placement notes were issued with a blended tenor of just over 6 years and an attractive fixed rate of 5%. As the chart on the top right shows we have successfully diversified our sources of funding giving us access to greater pools of capital and the flexibility to enter different markets when conditions are favourable as we have demonstrated in the period.

10:10 At 4.8% our weighted average cost of debt has now largely adjusted to market levels and importantly 92% of our drawn debt is either fixed or hedged which we expect to increase towards 100% in the coming months. In December, fixed ratings reaffirmed the company's BBB Plus investment grade credit rating and we remain fully committed to at least maintaining this rating. We have been very active in the investment market and have taken leverage to 43% as we executed on our pipeline. We monitor leverage through both loan to value and net debt EBITDA. On a pro forma basis, net debt EBITDA is 8.2 times But with a full period of income from recent acquisitions we expect to operate at the lower end of the 7 to 8 times range within the next 12 months and consistent with historical levels Our income is largely backed by investment grade covenants which supports operating at the current levels however we do remain prudent in managing leverage and maintain significant headroom across all of our covenants So in summary, we have delivered material cost reductions, a 32% reduction in overheads in the first half. We completed earnings accretive acquisitions, deploying £398 million of capital at an attractive 6.5% net initial yield.

11:37 And we were pleased to upgrade our dividend guidance to a minimum uplift of 2% per annum for FY27 onwards. And with that, I want to hand you back to Rob, who will take you through the market and investment update. So UK grocery is one of the world's most competitive markets. So it's really impressive that we've seen Tesco and Sainsbury's in this environment continuing to grow market share and of course that's coming from like-for-like sales increases from existing stores rather than new floor space. Asda remains the third largest grocer but has continued to lose market share and but there is a new management and a clear turnaround strategy for that business and another name just worth calling out on this page Lidl impressive market share growth but of course that is coming from new store openings I mentioned some of ASDA's challenges there and we did undertake a further 10 store sale and lease back into our joint venture at an accretive 7.4% net initial yield during the period and as ever it's about strong trading established grocery locations for us evidenced here by the 23 years of average of trading history and that just gives us absolute confidence that there'd be alternative occupier demand for these locations that are mission critical assets with low competition

13:09 The rents have also been set low at £19.90 per square foot, which is highly affordable relative to the store turnover performance. And being a stay and lease back, it means we get three years of trading history to be able to diligence that. We've also got attractive lease terms of 25 years of annual inflation linked uplifts. And then the last point on this page, capital value per square foot around £250, which is well below replacement cost. and that's a function of that wide acquisition yield and also the low rents and it's worth pointing out that if we had Tesco or Sainsbury's on on those same attractive lease terms that capital value would be more like four to five hundred pounds a square foot so this is a great deal for us and we'd love to do more of it if we get the chance and it's the scarcity of new food store locations that supports this demand from alternative occupiers and we show an example on the left here a site in Wolverhampton over 40 years of trading history as a supermarket location under multiple grocers most recently Tesco who acquired from Waitrose and we know that Tesco have been looking to get into that catchment for over 25 years the point being that strong food store locations simply don't go vacant then on the right hand side of the page the home base administration and the vacancy that provided a rare opportunity and Sainsbury's paid a premium to take on 12 of the former home-based leases and some of the rents there that we're seeing are upwards of £28 a square foot so setting

14:39 some strong evidence for us. Right, online grocery we've seen now return to its long-term growth trend reaching 12.2% last year and that's the highest it's been since the pandemic levels but when you drill down into that growth you can see that it's the omnichannel grocers that continue to dominate online and on the left hand side you can see strong growth from Tesco's and Sainsbury's and yes Ocado was the fastest growing but when you look on the right hand side of the page and if you look at Tesco's online market share the light blue at the top of the bar you can see that that Tesco's online business is more than double the size of Ocado's entire business and when you take account of the in-store sales as well 44 billion of annual sales for Tesco, that's more than 14 times the size of Ocado.

15:32 So grocery is all about scale and so you can see it's the omnichannel grocers that are the best place to win. And an interesting area of the market is that we've now seen rapid online grocery where consumers can get their products within a 30 minute drive time. That's now around 10% of the convenience channel. and a few years ago we saw a number of disruptors attempt to come into the market investing significant amounts of capital to try and establish their own dark store networks and supply chains and in the bottom left there we've given the example of Amazon that shows you even the most well capitalized entrance to the market it's not easy and in the middle you can see again it's the omnichannel grocers that are able to respond to this new competition and they've introduced rapid online fulfillment at a low cost through existing store networks and supply chains and that's both through their own solutions in the middle but also on the right through those third-party delivery providers so it just creates a very high barrier to entry or to disruption and it's the mission critical real estate for these supermarket tenants that we own and we've shown you on the left Tesco's online omnichannel distribution map the blue dots being each of the omnichannel stores in their network and on the right in that illustration there the green dots on the map are these regional grocery distribution centers of which there's around 20 in the country

17:06 and that supports the entirety of the store network. So these are absolutely mission critical, supporting that 800 or so large format stores, around 3,000 convenience stores. So it doesn't matter whether a product is sold online or in store, it all goes through that same distribution network. And of course when we're acquiring these properties we're talking to the tenants, the grocers, to understand exactly how important they are to their distribution networks. Turning now to the joint venture so we've mentioned that we rapidly scaled this through a series of transactions to now be 23 stores total value of 845 million at net initial yield of six and a half percent but this is really demonstrating the value of both the platform and our sector specialism as we're generating two million a year of management fee income now and we've been recycling that capital from the joint venture into 398 million of earnings accretive acquisitions since July and on the left again that range of both store formats but also grocers and we took that our French exposure to scale which I'll come on to in a moment but I mentioned earlier our ability to maintain those attractive investment fundamentals as we grow and you've got that on the right hand side of the page there six and a half percent net initial yield average lease length for 15 years 100% of which is inflation linked and again maintaining that high quality of income with 70%

18:36 being investment grade. And all the while we're targeting this mission-critical grocery property let to the leading grocers. So in keeping with that was the 123 million euro further tranche of Carrefour Seine and Leaseback. Now this is a great grocer for us to be working with, 21% market share, 42 billion euros of annual sales and again investment grade credit rating and then at the store level we've acquired at 6.6 percent net initial yield so it's accretive but also being a sale and lease back we get that three years of store trading history so we're able to ensure again the rents were set very low and producing a very low capital value per square foot which again is below replacement cost So as we grow we're absolutely maintaining our capital discipline with that focus on quality and returns and we've just shown you a few examples on this page.

19:36 On the left hand side a Tesco in Hampshire which on the face of it rents were affordable relative to trading and so the returns would have stacked up but actually when we did our diligence on it site cover is high competition is high and that just meant store trading is actually pretty average so it didn't meet our quality criteria example in the middle there another Tesco which on the face of it 14 years annual inflation linked lease strong performing store omnichannel so it ticked the boxes but actually it was really quite over-rented and where the pricing got to on that it just started to stretch our returns assumptions too far so we we walked away from that one and then lastly on the right hand side a store we did buy so 16 years annual inflation link leads to Sainsbury's very strong performing store so the rents are very affordable and this was the store that we acquired in a truly off-market transaction so just proving how our sector specialism unlocks those unique opportunities for us so now we're well positioned for the next phase of growth We operate in a highly defensive sector that's resilient through economic cycles.

20:53 We own a portfolio of mission critical food infrastructure assets with those attractive property fundamentals under triple net leases. The proceeds of the JV have now been fully redeployed and with that we've updated our guidance to that 2% minimum dividend uplift per year from the next financial year. And as I mentioned, we have these ambitions to double the portfolio in size through an attractive pipeline. And that is where our sector specialism comes in. The team, the expertise, the relationships to underwrite anything across the grocery property investment universe. And we have the access to capital as we've shown through the joint venture and through also the bond issue.

21:38 So with that, we will hand over to questions. Thank you.

21:48 Good morning John Carhill from Sequel. Thanks for the presentation, particularly pleasing to see the significant increase in the dividend guidance. I just wanted to refer back to slide 7 in terms of your longer term ambitions and two questions if I could please. First on the grocery distribution 10% element, maybe you could just give a bit of detail as to what that might look like in terms of the size of the units, could you even go for something forward funded, look at the dark stores, a bit more colour on that please. And then secondly, not to try and lead the witness too much, but it will take time to achieve this ambition, but when you get there, is the view that you will then be in a position to perhaps look at a dividend that is more closely aligned to inflationary increases, as good as the 2% is, that would be sort of the holy grail.

22:38 Yeah, I'll take the first bit and I'll let Mike do the second. So look, the point for us is it's again about mission critical properties so we're open minded as to what that might exactly look like and what we've shown here is an illustration because we may sit here in a year, two year time and we've not bought any. It will be opportunity led, it will come down to where we can best drive the returns but what we want to be clear about is anything that is in that grocery property investment universe the same tenants where we're speaking to them and we can understand that it's mission critical and we can deliver returns we will absolutely kind of be looking at and we brought the team we that's why we talked to some of the team members we brought in who have that expertise in the full range of grocery property whether it's distributional stores And just on the dividend point, clearly the last 12 months have been very transformational for the company. We've worked extremely hard to deploy the capital from the joint venture proceeds so we are now fully deployed which gives us also in addition the cost savings gives us the confidence to increase the dividends to that minimum 2% target of course with being so heavily linked to inflation in terms of our lease structures that would be the ambition at some point that we can pass through the inflation uplift that we're getting at the top line through to dividend growth but I think notwithstanding the point that we've worked incredibly hard to get from a position where we were to where we are today where we can upgrade that guidance to a minimum target of 2% uplift from next year onwards.

24:08 Great, thank you.

24:15 Morning, Jonathan Kamaita, Goldman Sachs. So, obviously, strong vision in terms of growth. Would all these types of assets also apply to non-UK assets, i.e. would you also look at distribution assets on the continent, first question? And second, on the cost, obviously, as you scale up potentially, substantially over time, where do you think that upper cost ratios, et cetera, are ultimately already given guidance for, next to appreciate? I'll do the first bit again and you can do the second. Again, I think what I'd say is we're open-minded. I think the move with Cart 4 was a good example of working with an operator that ensure we've got sufficient scale in the market but we could also understand that market so any new geographies or asset class in that whether it's stores or distribution we will be doing a lot of work before we we enter that market I think the easiest move for us in the near term would be Tesco Sainsbury's given our relationships and the extent of our exposure to them that's the obvious step if we were to do something in the distribution space so yeah anything overseas i think would be will be very measured put it that way yeah fine and just just turning to the cost ratio point we again very pleased to see the benefit from internalization coming through 32% reduction in in overheads in the first half 9.2% we're very much on target to deliver that sub 9%

25:46 from next year Obviously we've made some investment hires. Operationally we've got a very efficient business platform so as we scale, yes I would expect that kind of hurdle to reduce. Probably be reticent to put a number on it today but clearly there would be a lot of operational leverage we'd be able to drive that more close to 8%.

26:11 Morning, it's James Caswell from Bill Hunts. Obviously you've rotated some of the assets from your own balance sheet into the JV and that looks to be pretty accretive. I mean in terms of the appetite from Blue Hour side is there more appetite to do more of that and equally on your own balance sheet do you have more assets that would be suitable for that JV that you could rotate in and then thinking further afield what's your thoughts on kind of establishing new JVs and some of the kind of site adjacencies you've discussed? Yes, so look, aspirational target when we created the joint venture was a billion, we've got to shy of 850 million already and certainly look we've just transferred that further set of stores into the vehicle so the appetite is definitely still there from Glorale and from our perspective it's a great way for us to be able to scale it's very efficient for us we generate that management fee so there are more stores that we potentially have earmarked to move across and what it means is if there's stores that are in the market that don't necessarily fit Income REITs the Blue Owl Vehicle has a specific strategy and therefore there is room for further joint ventures and given the platform and the specialism and our unique portfolio there is

27:43 potentially an ability to see something maybe at the lower yielding end so we're absolutely having those conversations.

27:55 4% Total Accounting Return, very respectable but clearly the backdrop is an awful lot of activity in the period. Any idea how much that held the Total Accounting Return back by and looking forwards, what do you think a sustainable Total Accounting Return is for the portfolio and the business as we are today? So if I take an overly simplistic view of what the adjusted accounting return might be we showed that there was about £25-26 million of acquisition related costs so again simplistically that is just over probably 2p I would then say our adjusted total accounting return would have been more like five percent or low fives but notwithstanding the point that we've been the strategic importance to enter into the joint venture and redeploying that capital all things being equal with kind of stable within a stable yield environment you can come to see a pathway where we're delivering kind of eight to ten times total accounting return or ten percent total accounting return towards the upper end of that is very achievable for us a lot of the growth coming through over the last few years has been capitalizing from the rents like this we get on the portfolio that are contractual so you've seen that growth coming through so yeah absolutely the upper end of eight to ten percent should be achievable for us

29:30 Charles and Jonathan from Government Tax again. On the valuation evidence versus what they're pricing, where are we on that debate currently? So, valuers are ultimately conservative I would say and we proved when we re-gid some stores last year at rents that were 13% above the valuers ERV and we saw a capital value uplift on those stores of around 10% since then. under the valuers numbers we're again give or take 9 to 10% over-rented. Our view is we're absolutely rent-rented, affordable at that 4% rent turnover, average of £24 a square foot. So one of the jobs we have tasked Jamie, our new arrival from Sainsbury's with, is to get out there and educate the market on what an affordable rent is and pushing on that growth agenda. So it's as much on us as anyone else I think to drive that.

30:27 What's the rationale for operators to sell their mission critical assets into the market and when they could potentially find cheap credit using their own balance sheet and is the Is there from supers perspective is the high-yield segment should it be most interesting for the company or other attractive opportunities across the piece Yes, I guess that from operator perspectives Tesco Sainsbury's for instance still own only around 60% or so of their stores. So it's it's a one element of their financing and balance sheet strategy.

31:15 We've seen obviously after Morrisons undertaking selling leasebacks more recently and that's in part driven by the private equity buyouts but also historically they own 90% or so of their stores so they've absolutely had the capacity to do it so yeah it's from our perspective is a great way for us to access stock and we're absolutely focused on making sure we buy the best performing stores when we do that.

31:40 Sorry Chris, what was the second part of the question? Sorry, just coming back to that, it was the super, how do you balance I guess chasing high yield versus slightly tighter yielding stores, how do you think about that in terms of the benefits to the company? I think if you if we were to try and only buy things that ticked every box you wouldn't buy very much right it has to be a strategy where we acquire some stores that are high yielding or some that are lower yielding and provided on on a blended basis it's all accretive then then that's how we manage that strategy but I talked earlier to those investment fundamentals so 70% or so being investment grade 90% or so grocery income the long leases the inflation linkage so that's the strategy but we will buy stores that are high yielding within that.