Shares magazine

Supermarket Income REIT is a durable cash machine to own

A great way to invest in supermarket safe havens

Supermarket Income REIT (SUPR) 77.1p

Market cap: £959 million

Experts reckon we could survive three days or nine meals with empty supermarket shelves before a full-blown societal collapse. That’s how vital supermarkets are to our everyday existence. So, invest in shares of Tesco (TSCO), Sainsbury’s (SBRY) or Marks & Spencer (MKS) during times of market turbulence?

That is a possible option, but Shares thinks there’s a more interesting way to play the theme – Supermarket Income REIT

As the name suggests, this is a real estate investment trust that makes money by leasing retail space to supermarkets. It has a portfolio of 82 properties worth an estimated £1.8 billion, scattered across the UK and France. These include Morrisons, Asda, Waitrose and Carrefour (France) stores, but roughly three quarters of the rent roll comes from Tesco and Sainsbury’s outlets.

You might argue that this represents considerable concentration risk, but we believe this is not a major concern given the blue-chip status of both. Tellingly the trust has never failed to collect 100% of rents since floating on the stock market in 2017.

NOT RUN-OF-THE-MILL STORES

These are not run-of-the-mill stores, but omni-channel grocery pitches that are dominant in their area, providing the full range of in-store, click and collect and online shopping. That means net rental yields of 6%, higher than real estate sector averages below 5%, with in-built inflation-linked reviews.

They are also long-term contracts, lending that income streams a high level of security. The portfolio has an average term to expiry of 12 years. In short, long-run rental agreements with blue-chip clients that won’t expire for years, resulting in an income stream which should be predictable and durable.

Dividends are paid quarterly and have incrementally increased since the 2017 IPO. A 6.12p per share dividend is expected for the full year to end June 2025, rising to 6.24p in 2026, and presumably, up again thereafter.

If that doesn’t sound like much, it represents a near 8% dividend yield at the current 77.1p share price, which has struggled against higher interest rates like the rest of the sector. That makes now a great time to invest, not only locking in a very attractive yield, but at a near 14% discount to net assets to boot.

Why such a wide discount? We previously mentioned that higher base rates reduce the attractiveness of income assets, but that should reverse once rates start to come down. The other issue of costs has recently been addressed – the trust bringing the portfolio management team in-house. This function was previously outsourced to Atrato, but Supermarket Income REIT has reached the scale to do this internally.

This saw Atrato’s Rob Abraham and Mike Perkins, both crucial to the REIT’s progress in recent years, join Supermarket Income REIT as chief executive and finance chief respectively, solving any issues around long-term leadership. Supermarket Income REIT estimates that these steps will save it around £4 million.

WHY RECYCLING ASSETS COULD HELP

Something else that could improve the market’s mood towards the trust is its recent pledge at capital recycling, which sounds to us like it means to take a more proactive approach to asset trading. Earlier this year Supermarket Income REIT sold a Tesco store in Newmarket to the chain for £63.5 million, 7.4% above its estimated value in June 2024.

Future proceeds might be reinvested back into the portfolio or perhaps returned to shareholders through share buybacks or even special dividends, time will tell. These deals should also help address the discount as they demonstrate the true value in the portfolio.

With the UK big-four supermarkets (Tesco, Sainsburys, Morrisons and Asda) increasingly under pressure from retailers like Aldi and Lidl, owning their own real estate to make operating cost savings that can be funnelled into product price cuts may become an increasingly attractive lever to pull, which should help Supermarket Income REIT secure other stores sales at higher than book value.

Investors may need to be patient. Getting the market to re-evaluate Supermarket Income REIT stock is likely to be a slow process. But, in the interim, investors will be getting paid an 8% yield for their patience, a very attractive low-risk return. Ongoing charges are 1.36% according to industry body the Association of Investment Companies.