Supermarket Income Reit Plc · LSE:SUPR
Supermarket Income Reit — H1 FY2020 Earnings Presentation
47 slides from Supermarket Income Reit's earnings presentation, February 2020
Slide 1: Results Presentation: Investing in the Future of UK Grocery
INVESTING IN THE FUTURE OF UK GROCERY RESULTS PRESENTATION FOR THE SIX MONTHS FROM 1 JULY 2019 TO 31 DECEMBER 2019
Slide 2: Agenda and Board of Directors
Agenda Board of Directors Section Page 1 Highlights 3 2 Financial highlights 4 3 Business highlights 5 Nick Hewson Vince Prior Jon Austen Cathryn Vanderspar Chairman Senior Independent Chair of Audit Independent Director 4 Investment strategy 6 Director Committee 5 Portfolio overview 7 6 Financial r
Slide 3: Significant growth of SUPR
Image: Sainsbury’s Ashfo Significant growth of SUPR Grocery sector evolving strongly Supermarket property investment market strengthening First green energy initiative for SUPR 3
Slide 4: Financial Highlights for the six months ended 31 December 2019
Financial Highlights for the six months ended 31 December 2019 Six months to Six months to Change 31-Dec-19 31-Dec-18 Annualised passing rent £26.1m £16.5m 59% EPRA Earnings £7.2m £4.7m 53% EPRA EPS 2.5 pence 2.5 pence Flat Quarterly dividend per share 1.46 pence 1.42 pence 2.9% 31-Dec-19 30-June-19
Slide 5: Business highlights for the six months ended 31 December 2019
Business highlights for the six months ended 31 December 2019 £114.8m acquisition of two accretive omnichannel assets • 5.2% average NIY vs Portfolio average of 4.9% Portfolio highlights • Portfolio WAULT maintained at 18 years £490.4m • All RPI linked rent reviews Independent portfolio valuation £1
Slide 6: Highly specific investment strategy
Highly specific investment strategy Last mile grocery RPI linked Large flexible fulfilment in the UK rents sites Mission critical omnichannel stores with Locations optimised for 15 minute drive strong trading track record Long leases with no breaks times Full-year target dividend of 5.8 pence per sh
Slide 7: Portfolio overview
Image: Sheffield Morrisons store Portfolio overview Portfolio by location Portfolio by tenant mix by valuation 41% 11% 7 48% 8 5 2 6 4 9 3 1 Portfolio valuation: £490.4m Portfolio key Portfolio valuation yield: 5.0% 1 Sainsbury’s, Ashford 6 Tesco, Mansfield 2 Morrisons, Sheffield 7 Tesco, Cumbernaul
Slide 8: Financial Results
Image: Sainsbury’s Preston store Financial Results • Income statement • Statement of financial position • Movement in EPRA NAV per share • Debt financing overview • EPRA metrics 8
Slide 9: Income statement
Income statement Six months to Six months to 31-Dec-19 31-Dec-18 £m £m Rental income 11.9 8.3 Administrative and other expenses (2.3) (1.5) Finance costs (2.5) (2.1) EPRA earnings 7.2 4.7 Dividend paid 8.2 5.1 Adjusted EPRA cost ratio (1) 17.7% 17.0% On going cost ratio (2) 1.6% 1.7% (1) The Group c
Slide 10: Statement of financial position
Statement of financial position As at As at 31 Dec 2019 30 June 2019 £m £m Investment property 490.4 368.2 Cash and cash equivalents 7.7 9.9 Other assets 6.1 3.5 Gross assets 504.2 381.6 Borrowings (166.4) (143.7) Prepaid rents and other liabilities (8.8) (6.4) EPRA net assets 329.0 231.5 EPRA NAV p
Slide 11: Movement in EPRA NAV per share
Movement in EPRA NAV per share Components of EPRA NAV pence per share 100 2.5 (2.8 ) 0.5 2.5 (2.3 ) 97 97 95 90 85 EPRA NAV 31 June Equity issue - Acquisition costs Property valuation EPRA earnings Dividend paid EPRA NAV 31 2019 premium to NAV December 2019 less issue costs 11
Slide 12: Debt financing overview
Debt financing overview Cost of borrowing reduced plus new banking relationships • New £77m 5-year term loan with Deka Bank at 1.9% fixed rate • Weighted average finance cost down from 2.4% to 2.2% 32.4% Net loan to value ratio as at 31 Dec 2019 Facility Provider Running finance cost Expiry date £10
Slide 13: EPRA metrics
EPRA metrics As at As at 31 Dec 2019 30 June 2019 EPRA NAV Per Share 97 pence 97 pence EPRA Triple Net Asset Value (NNNAV) Per Share 97 pence 96 pence Six months to Six months to 31-Dec-19 31-Dec-18 EPRA EPS 2.5 pence 2.5 pence EPRA Net Initial Yield 5.0% 4.9% EPRA Topped Up Net Initial Yield 5.0% 4
Slide 14: Business Update
Image: Sainsbury’s Cheltenham store Business Update • Rent reviews • Contracted RPI uplifts • Rooftop solar update • Sustainability progress • New sustainability partnership • ESG update 14
Slide 15: RPI rent reviews impact on annualised rent
RPI rent reviews impact on annualised rent Like for like rent reviews (£m) (1) + 2.7% average rent increase + 2.3% average rent increase 26 2.2% 2.4% £56 k £26.3 m 2.4% £72 k 26 13.0% 5 year 2.3% £74 k (2.4% annual ave) £36 k £26.1 m 26 £329 k 26 3.0% £ms 2.6% £80 k 26 £104 k £25.6 m 25 25 25 Annual
Slide 16: Contracted RPI uplifts drive rental growth
Contracted RPI uplifts drive rental growth Estimated future annualised rent receipts and future yield on purchase price (1) 32 6.0% 31 5.6% 30 5.5% 5.3% 5.2% 29.5 29 5.1% Yield on purchase price % 5.0% Annualised rent £m 5.0% 28.6 28 27.6 27 27.1 26.6 26 26.1 4.0% 25 24 23 3.0% Dec 2019 Dec 2020 Dec
Slide 17: Rooftop solar commercial terms agreed
Rooftop solar commercial terms agreed Indicative Thetford scheme visuals Thetford store - inaugural rooftop solar array installation • 370 kW rooftop solar array • Generate 310 MWh of decarbonised electricity per annum • Generated energy sold to Tesco under long term power purchase agreement • 7-8%
Slide 18: Sustainability progress
Sustainability progress Rooftop solar progression Structural & Installation Initial Plans DNO Store Operator technical terms agreed evaluation developed Approved survey with operator Thetford Tesco ✓ ✓ ✓ ✓ ✓ Bristol Tesco ✓ ✓ ✓ ✓ - Cumbernauld Tesco ✓ ✓ ✓ ✓ - Scunthorpe Tesco ✓ ✓ ✓ ✓ - Mansfield Tes
Slide 19: New sustainability partnership
New sustainability partnership Investment Adviser has formed strategic sustainability partnership • With EVO Energy UK’s leading commercial renewable energy company • Execute and manage sustainability projects across our Portfolio Comprehensive rooftop solar power investment plan across our Portfoli
Slide 20: Environmental, social and corporate governance
Environmental, social and corporate governance ENVIRONMENTAL INITIATIVES SOCIAL INITIATIVES GOVERNANCE Assets with detailed environmental plan 100% Into Independent Board members 100% Nominated Charity (2) University Percentage of estate GIA capable of solar energy 71% Female Board members 25% (2) W
Slide 21: Grocery Sector
Image: Tesco Mansfield store Grocery Sector • The future model of grocery • Capital investment in last mile innovation • Omnichannel stores fulfil online • Last mile grocery fulfilment in the UK • Global convergence • Improving store profitability • Grocery forecasts • Strong tenant covenants 21
Slide 22: The future model of grocery
The future model of grocery “Capital investment and innovation in last mile logistics continues to be directed toward leveraging our grocers’ existing store networks. As a result, growth in e-commerce sales is driving value creation in these locations that is not yet obvious to market participants”
Slide 23: Capital investment in store innovation
Capital investment in store innovation Operator in store last mile fulfilment investment initiatives West Bromwich– Urban Fulfilment Centres (UFC) New Hampshire - Urban Fulfilment Centres (UFC) • 20,000 square-foot facility • 20,000 square-foot facility • Tesco Extra West Bromwich • Walmart Supercen
Slide 24: Omnichannel stores fulfil online
Omnichannel stores fulfil online IGD Channel forecasts 2019 - 2024 (1) 120 109 74% of online grocery 106 orders are fulfilled in supermarkets (2) 100 26% 74% 80 In-store fulfilment CFC distribution £Bn’s 60 48 41 40 34 25 20 17 12 10 9 0 Supermarkets Convenience Discount Online Other retailers 2019
Slide 25: Last mile grocery fulfilment in the UK
Last mile grocery fulfilment in the UK Tesco’s online distribution network (1) Sainsbury’s online distribution network (1) Omnichannel stores have optimal characteristics for last mile fulfilment • Larger full range stores - urban warehouse Online opening dates Online opening dates • Situated in pop
Slide 26: Global convergence on the future model of grocery
Global convergence on the future model of grocery 2007 2011 2012 2017 Amazon launch Fresh, selling and Walmart commences testing on Alibaba launches TMALL Marks and Spencer trial online food delivering grocery through its home delivery service, not until Supermarket selling grocery via delivery serv
Slide 27: Improving store profitability
Improving store profitability Operator investment initiatives (1) • 20% – 30% supermarket productivity opportunity (1) • £2.2bn combined capital expenditure allocated by Big 4 to supermarkets in 2020 New self-serve bakery and meat counters Cashless stores Repurposing space (1) Tesco 2019 Capital Mar
Slide 28: UK food and grocery sales forecast
UK food and grocery sales forecast IGD forecasts 2019 -2024 (1) +12.5% forecast growth 220 218 212 210 207 Sales (£bn) 200 202 198 194 190 180 2019 2020 2021 2022 2023 2024 Actual Forecast (1) Source IGD 2019 28
Slide 29: Strong FTSE100 tenants
Strong FTSE100 tenants Balance sheet lease adjusted debt (£bns) (1) 24.0 21.7 10.0 Improving covenant strength (1) 7.7 7.6 7.6 7.6 7.5 3.5 3.1 16.7 8.0 2.7 15.5 3.0 2.5 • £11bn debt reduction since 2015 16.0 12.3 12.2 6.0 2.5 2.2 2.1 £bn 2.0 • Tesco upgraded by Standard & Poor’s November 2019 8.0 4.
Slide 30: Investment Market
Image: Sainsburys Ashford store Investment Market • Supermarket property yields • Supermarket property yields have decoupled from bonds • Supermarket property yields source of RPI • Investment volumes • Transactional evidence • Lease re-gear evidence • Outlook 30
Slide 31: Supermarket property yields offer value
Supermarket property yields offer value MSCI Yields 2004 -2019 (1) 9.0 MSCI Net Initial Yields September 2019 Supermarkets 5.2% Distribution warehouses 4.6% UK Commercial property 4.6% 8.0 7.0 6.0 5.0 4.0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Supermarket NIY
Slide 32: Supermarket property yields have decoupled from bonds
Supermarket property yields have decoupled from bonds Historical performance of supermarket property yields and Tesco corporate bonds (2029) (1) 7.0 6.0 5.0 Yield (%) 2.9% Spread 4.0 3.0 2.0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Supermarket NIY Tesco Corpora
Slide 33: Supermarket leases offer one of the cheapest sources of RPI
Supermarket leases offer one of the cheapest sources of RPI Historical performance of supermarket yields and UK index linked gilts (2035) (1) 7.5 6.0 4.5 3.0 Yield (%) 2.9% 7.9% spread spread 1.5 0.0 (1.5) (3.0) 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Supermar
Slide 34: Supermarket property investment volume
Supermarket Property Investment volume Supermarket transactions 2010 - 2019 (1) £2,000 + 70% increase in £1,800 £1,760 volume £1,780 £1,575 £1,600 £1,390 £1,400 £1,320 £1,290 Total capital value £m £1,200 £1,180 £1,200 £1,100 £1,050 £1,000 £800 £600 £400 £200 £0 2010 2011 2012 2013 2014 2015 2016 20
Slide 35: Valuations supported by transaction evidence
Valuations supported by transaction evidence Purchasers of supermarkets 2019 (1) Transaction value £m Realty Income 539 Tesco 181 SUPR 159 Blackrock 93 DTZ 70 BAE Pension Scheme 48 Aviva 45 Alpha Real Estate 35 Other 610 Total 1,780 (1) Source: Property Data UK 35
Slide 36: Lease re-gear evidence
Lease re-gear evidence Supermarket lease and re-gears rates per sq ft (1) Arbitration review 30 Cambridgeshire, £29.75 £11 per sq ft dispersion Buckinghamshire, £28.75 28 West Midlands, £26.65 Leicestershire, £27.27 26 Leicestershire, £24.75 24 Rent £ Sq.Ft. West Midlands, £21.50 Somerset, £21.30 22
Slide 37: Sector outlook
Sector outlook The fundamentals of the UK grocery market remain favourable • UK grocery spending to increase 12.5% in the next 5 years (1) • Operator credit covenants continue to improve • Increasing digitisation to improve margins and improve customer experience • Capital investment and innovation
Slide 38: Appendix
Image: Sainsbury’s Preston store Appendix • UK Grocery Sector credit strength analysis • Credit strength vs CVA use • Portfolio metrics • Long unexpired lease terms • Outline rental profile • Outline returns profile • Share price performance • Key terms 38
Slide 39: Appendix: UK Grocery Sector credit strength analysis
Appendix: UK Grocery Sector credit strength analysis Balance Sheet analysis (1) Net Debt/ Lease Operating Net Debt/ Market EBITDAR EBITDAR Credit Revenue EBITDAR Adjusted Cash Flow EBITDAR £bn Cap.(2) Margin (2022) Rating Net Debt (2019) (2019) Target Tesco 21.0 51.6 4.3 6.5% 12.2 2.0 3.7x 2x - 3x B
Slide 40: Appendix: Credit strength vs CVA use
Appendix: Credit strength vs CVA use High profile company voluntary agreements (1) Investment grade grocery retailers Predominantly private equity backed with very Public companies with investment grade balance weak balance sheets sheets • Predominantly private equity ownership • Publicly traded FTS
Slide 41: Appendix: Portfolio metrics
Appendix: Portfolio metrics Valuation Store Size Store Size Valuation Passing Rent WAULT Rent Rent Review Site Size Property Tenant yield GIA 000, NSA 000, (£m) (£m) (Yrs) Review Floor – Cap (acres) (%) (Sqft) (Sqft) Scunthorpe Tesco 57.1 3.0 4.9 21 Annual RPI 0% - 5% 98 65 8.3 Cumbernauld Tesco 57.
Slide 42: Appendix: Long unexpired lease terms
Appendix: Long unexpired lease terms Portfolio maturity profile by annualised rental income £m (1) 35 32.3 30 31.2 30.6 30.4 30.1 29.9 29.5 28.6 28.9 28.4 27.6 27.8 27.2 25 26.6 27.1 26.6 25.6 25.1 22.5 20 £m 15 14.7 10 5 5.0 5.1 5.3 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2
Slide 43: Appendix: Outline rental profile
Appendix: Outline rental profile Illustrative rent profile per sq ft (Passing + Re-gear) (1) At end of current 2 lease, negotiate lease extension 2 Receive rent plus RPI increases Rent £ sqft (+10 yrs) Acquire store 4 Sell store and 1 (including costs) realise proceeds 1 3 5 7 9 11 13 15 17 19 21 23
Slide 44: Appendix: Outline returns profile
Appendix: Outline returns profile Illustrative IRR profile from contracted rents plus different re-gear rent assumptions (1) Now Term of lease Re-gear and exit Rent Re-gear Re-gear Re-gear RPI uplifts £27 sq ft ave. £48 sq ft £27 sq ft £15 sq ft £31 sq ft real rent £19 sq ft real rent £10 sq ft real
Slide 45: Appendix: Share price performance
Appendix: Share price performance Relative share price performance for the Period Trading volume – 4 week rolling daily average since IPO 7.0% Total Shareholder Return increased in traded volume 110 14,000 105 12,000 100 10,000 8,000 95 6,000 90 4,000 85 2,000 80 0 Nov-17 Nov-18 Nov-19 Jul-17 Jul-18
Slide 46: Appendix: SUPR Key terms
Appendix: SUPR Key terms • UK listed REIT The Company • London Stock Exchange Main Market, Specialist Fund Segment • Target assets with long unexpired lease terms Investment policy • No individual property will represent more than 40% of the prevailing Gross Asset Value • At least 80% of its Gross A
Slide 47: Important Notice
IMPORTANT NOTICE The information provided in this Presentation is for background purposes only and may be materially updated, completed, revised or amended without notice. Neither the Company nor anyone else is under any obligation to update or keep current the information contained in this Presenta
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