Supermarket Income REIT (LSE:SUPR) Q4 2026 Earnings Call

0:01 Right I think we're time to get going everyone so good morning welcome to super's full year results this is a year as the title says in that we've really established the super as a platform for growth so we're committed to delivering value for shareholders and we've been progressing on that strategy to grow to gross assets today at 2.2 billion pounds that includes our 50% share of the joint venture and is up from 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 dividends for the coming financial year or the current financial year.

0:47 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've scaled the joint venture with Blue Owl to £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 £676 million of earnings accretive acquisition since July last year that includes a number of portfolios selling leasebacks direct with operators and also 19 stores which we acquired in the secondary market.

1:33 We've also undertaken a billion pounds 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 two stores as well as we expect it to be accretive for the total return. And then lastly, of course, delighted to raise £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 recognise this slide from our interim results back in March. And we then talked 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.

2:32 So those proceeds have been fully deployed in the space of two months. It was our first equity raise since 2022, and we've acquired nine high-quality grocery properties for a total of $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 a large format top performing omnichannel store for Tesco five 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 and a very low affordable rent of £14 we've also seen the tenant make significant capital investment in the fit out of this building.

3:50 And then on the right M&S grocery anchored retail park in Nottinghamshire. Now this was an interesting one because we had it under offer back in February and then 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'd 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 a We've got various sources of capital to deliver that. I've talked already there to equity raising.

4:49 Also joint ventures as we've successfully done with Blue Owl and 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. With that, I'll hand over to Mike to take 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.

5:35 As 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 sustainable long-term shareholder value. So if we turn to the headlines of the period, you'll see net rental income increased by 6% to £122 million. The EPRA cost ratio improved to 9.2%, which is a reduction of 380 basis points. EPRA earnings of 5.7 pence was down 4%. The portfolio, which reflects post-year end activity, increased to £2.2 billion, which is up 37% since June 25th. RF per NTA was marginally higher at 810.5 pence and taken together with dividends paid in the period the total accounting return was 7.5%.

6:24 So as I mentioned the key focus this year has been on REITs point of capital following the completion of the joint venture in May 25. As you can see from the bridge passing REIT stood at £170 million immediately prior to this transaction. The assets that were transferred into the JV reduced rent by £21 million was more than offset by the £454 million of acquisitions that were completed during the year which added £31.8 million of rent and that reflected an average net-to-shield of 6.5%. Together with the £2.1 million of light for light growth, passing rent increased to £129.5 million at the year end and following the equity raise which completed shortly after the period ends, we deployed these proceeds into Earnings Enhancement Acquisitions adding a further £14.8 million of annual rent and therefore as a result the pro forma passing rent has increased to £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 in rent collection 75% investment grade income and a sector leading 99.5% gross net income ratio What we ve shown on this slide is the value created for our capital recycling.

7:49 We ve transferred £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 spread of around 120 basis points. And as we ve shown on the right This translates into approximately 0.3 pence per share of annualised 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 the key objective of internalisation was to create a scalable platform that was capable of supporting growth without a material increase in overheads.

8:40 And the chart on the left shows the progress we've made. Since internalisation, the upper cost ratio has reduced to 9.2%, which is a reduction of 440 basis points, or equivalent to approximately £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 upper cost ratio to below 9% for FY27. which will reinforce our position as one of the most cost efficient companies in the listed real estate sector. As REIT continues to grow the portfolio, additional income can be delivered at relatively little incremental costs, creating operational leverage and supporting future earnings growth. So turning to earnings, every EPS reduced by 4% to 5.7 pence per share compared with 6 pence in the prior year.

9:34 One of the drivers was the transfer of assets into the joint venture which reduced earnings by 0.3 pence as we recycled the capital and redeployed the proceeds into future growth opportunities The increase in our weighted average cost of debt reduced earnings by a further 0.4 pence 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 a more diversified source of funding has increased our proportion of fixed rate debt as attractive pricing. Against these items, the business continues to deliver growth. The new JV management income fee is contributing 0.1 pence, whilst like-for-like growth added a further 0.1 pence.

10:22 In addition, the benefits of internalisation and our disciplined cost management contributed 0.2 pence, reflecting the operational leverage now within the platform. Overall, while EPS was marginally lower during the year, we strengthened the balance sheet, reduced our cost base and invested capital into earnings accretive acquisitions that are expected to support future earnings growth. Concerning to the balance sheet, we continue to deliver an income-led total return. Starting with the chart on the left, our per NTA increased to 87.5 pence, up from 87.1 pence at June 25. EPRA earnings contributed 5.7 pence, while dividend paid totalled 6.2 pence in the year. The portfolio delivered 2.8 pence of realised and unrealised gains, equivalent to 2.5% like-for-like growth, which was partially offset by acquisition-related costs.

11:21 Overall, EPRA NCA was 8.5 pence, and the total accounting return for the year was 7.5%. Turning to the chart on the right, what really differentiates Super 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. As a result, shareholder returns are driven 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 £1 billion of REIT financings, improving both maturity and diversification.

12:14 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 ends. 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 Plus 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.

13:11 We have been very active in the investment market and 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 7.8 times and with the benefit of a full period of income from recent acquisitions we expect to operate at the lower end of 7 to 8 times range on a normalised 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.

14:00 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 £676 million of earnings accrued through acquisitions. We've built a scalable platform with one 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. With that, I'll hand you back to Rob.

14:54 So the grocery sector now, which is of course growing, So highly resilient and backed by non-discretionary consumer spending. And it's the omnichannel grocers that we continue to see dominating the market. So Tesla, our largest tenant, 44 billion of annual sales in the UK, 28% market share, and that increases to 37% in the online channel. And we've 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 four percent a year for the last two 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.

16:01 On the left-hand side, the price comparison of a weekly shop if you're in the Tesco Convenience Express channel versus if you shop in the large format stores, around £800 a year of savings. And then on the right-hand side, so not only are items often 10% to 20% cheaper, you've got a much bigger product range, of course, at 20,000 to 30,000 products. 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 three 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.

17:18 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 anchored by Tesco but where we're building a new Lidl store as an extension to the retail warehousing terrace that's there 20 year lease to Lidl inflation linked and with attractive returns at an 8% yield on cost and then if we look a bit closer at that retail warehousing line up 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's so clearly that was going to go void in the future and then we also had concessionary lettings to one beyond and pound stretcher so since acquisition we've combined two of those units to create the new B&M store on a 10-year lease we've renewed the boots lease for a new five-year term So those two transactions combined with that new Lidl means that we've increased the walk by six years.

18:27 We've got 100% occupancy to national retailers and we've grown the net rental income for that retail warehousing by 400,000 and achieved a 10% valuation increase. We're also able to unlock value through lease renewals. So two of these signs in July, large format on the channel stores, top performers where In one case 15 cent reduction in another we renewed at passing rent both for a new 15 year term and it's worth noting that there's no rent free periods. There's no landlords 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.

19:17 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 letting so the examples on this page two of the M&S conversions of home-based stores new 20-year index linked leases being agreed at initial rents of £24 and £28 and we're starting to see that inform open market reviews so the example now Waitrose in Surrey achieving £24 rent per square foot on open market review that's up 16% so in that context our average rent to turnover of 4% average rent per square foot of £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 Hertfordshire 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.

20:26 In the middle, Lidl, Sam and Leaseback, 20 year leases, these are stores that are being built at the moment, 4.8% net initial yields 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 lease back 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 676 million of earnings accretive acquisitions that's redeploying the capital from the joint venture with Blue Owl but also from the equity raise in July across that range of strategies you can see on the page and as 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.

21:44 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.

22:16 Thanks for the presentation. Your growth ambitions are clear and very much welcome in a sector that's otherwise feeling pretty down in the mask about life. So I just wanted to ask you about the investment market, two sides to it. First of all, what are the supermarket operators thinking about life? Are there sale and lease back 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? Yeah so I guess on the supply demand for the operators it's still very much led by balance sheets so Costco particularly still very much active buying stores in selectively so individual stores in the secondary market and Income REIT plc joint venture so with the phase of deployment we've just been through and most of it well 82% was in investment grade income so we've got some

23:48 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 I spoke to some of those transactions with the core capital I think it was quite interesting two out of those three were well after the start of the Iran conflict and when you've seen cost of capital increase so I certainly think that that core capital isn't going anywhere I think we've still got very strong demand at that end that said the M&S example I gave was one where the vendor when we repriced 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 at an even better price so will continue to look very closely. We see everything in the market given our position as sector specialist so that means we can be selective and the pipeline today is over 500 million and 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.

25:04 Morning, it's Matt Spear from Peelhunt and thanks for the presentation. Two quick questions from me if I may. First one on the two lease renewals you did, driven by yourselves or by the occupier and given your comments around 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? Yeah, 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 over-baked. So that actually rents on what were over-rented stores wouldn't come down by as much as some were expected.

25:56 I think they came down to 4% rent return over in that case. The point here for us was showing actually some of the stores in one of the examples there renewed at passing rents. There was no rent reduction. So we do have some stores that are more under-rented and were able to extend the term without having to give a rent reduction. So it was really kind of trying to prove the opposite end. We're certainly not under pressure to renew any leases. We haven't got anything shorter than five years or so but it will just come down to if we can achieve a positive total return then then we'll continue to consider doing it but there's certainly no pressure. Thanks. And what we've said before is that where you have these re-gears 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 the EPRA light flight rent was up broadly 1% with those sort of re-gears into account so We have the ability with that, the contracting age of our income to offset those and if there was a material amount in one given year we've proven we can sell assets into a tighter yielding environment.

27:10 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 potential for additional either capital into that joint venture or potentially other parties coming along and creating structures with you? Yeah, definitely. Thank you. So the Blue Hour Vehicle, we set an aspirational target of a billion pounds when we formed that vehicle. it's now at 850 million or so so there's still some capacity before we reach the billion that isn't a hard cap buying 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 that Blue Owl 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 Owl vehicle is if we had a core capital partner with a lower return and targeting that low risk low return type opportunity set that might work quite neatly.

28:25 We've also seen with interest announced this week Realty Incomes JV with KKR and that looks like some pretty low cost of capital there. We're very much open-minded. We've shown our ability to grow through JVs through Etsy raising. It'll just come down to wherever the numbers look best and we'll kind of keep pushing on all fronts. Thanks very much.

28:57 Matt Norris from Carbis. 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 that the minimum uplift or 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 to as I said sustainability is the key to 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 passing through 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 us to a point where we can sustainably grow at 2% as I said the next job is to try and grow it by more than inflation.

29:56 When is cover achieved? On the equity raise we said that we'd be fully covered on the first full financial year after deployment. I'd expect us to be without giving forecast guidance consensus and this forecast would suggest that we'd get pretty close to cover next year and then fully covered the year after that.

30:29 Thanks for the presentation. Ashland VR, Deutsche Bank. On slide 7 you list out the various sources of capital for growth. You sort of alluded to it in your earlier questions but maybe you can just talk about which you expect to be the biggest contributor to your scale in the near term and how you're sort of thinking about capital recycling and if there's any more you can do there. Yeah, definitely. So I think it's probably hard to say because the numbers move around week to week at the moment, right? So we were we were very pleased to get the support to raise in july i think we certainly used to raise years ago twice a year um now uh it will just depend on the numbers and what's most secretive and um our our platform is actually quite attractive to partners to work with so um we've seen some quite good inbound interest as well and the the blue our vehicle is going caught attention and there are partners that would like to do something similar so yeah sorry sitting on the fence of it is quite hard to say as to which will be the main driver but we're the pipeline's there so it's just a case of what's going to be most accretive as to how we fund it but we're otherwise very open minded we're going to have to work hard be creative to deliver it but I think we've shown over the last year or so that we can do that and then in terms of capital recycling yeah there's there's some opportunity for some outright sales that as we look at it with some of that

32:01 core capital out there there may be some opportunities as Mike alluded to so maybe once you've re-geared a source selling to that to kind of prove the concepts as we talk to so yeah we're kind of exploring all opportunities on that front as well I think Chris might have some online.

32:35 So from Andrew Saunders at Shortat, so what are the long-term ambitions in grocery distribution and are the current acquisition opportunities more sort of accessible and attractive than stores at the moment? Yeah something we spoke to Previously was these avenues for growth and just thinking more broadly about Grocery property. It's very much relationship led it's Yeah It's not necessarily that we see better opportunity in either channel It's not that we're going to start selling stores to buy into sheds It's just a case of where we see value and attractive returns We will continue to allocate capital across whether it's large stores convenience Shares Europe and it's not necessarily that one is better than the other they all offer slightly different profiles in terms of returns so we look at it on a blended portfolio basis.

33:36 We talk a lot about rents turnover at the store level how does that compare to rent EBITDA at the store level? Yeah so in the UK at least it's broadly kind of three times covered so store level EBITDA margin will be 10-12% on a large store and if your rent to turnover is around 4% it's probably 2.5-3 times covered so that's again it's actually the rent to turnover the way we articulate it is an oversimplification the operators are very much looking at profitability as well.

34:14 and then a couple from Jonathan at GS. So on the recent rent reduction that was agreed, how did this compare to ERVs in the store? Broadly in line. So the store that renewed at passing was slightly below ERV, which is why we were able to renew it at passing and actually we converted it from open market rent to inflation linked. So we've unlocked some decent value by doing that, but that is why At the end of the day it was a proactive renewal on our part and there has to be some incentive as well for the tenant in those cases.

34:51 Final one. You speak to the £500 million pipeline. How do you see the pacing of these opportunities coming through? The pipeline is very much live. That's in front of us today and there's some very interesting opportunities that would be accretive. It's very much on the agenda at the moment. We've got the team working hard on both on the pipeline and how we can fund it. So yeah, I guess watch this space.