Supermarket Income REIT (LSE:SUPR) — Quarterly Update

0:01 Good afternoon, ladies and gentlemen, and welcome to the SUPERMARKET INCOME REIT PLC Investor Presentation. Throughout this presentation, investors will be in listen only mode. Questions are encouraged and can be submitted at any time using the Q and A tab situated on the right hand corner of your screen. Just please simply type in your question and press send. The company may not be in a position to answer every question it receives during today's meeting. However, the company review all questions submitted today and publish responses where it's appropriate to do so. These will be available via your investment company dashboard, and we'll notify you by email when they're ready for your review. I'd also like to remind you that this presentation is being recorded. Before we begin, we would like to submit the following poll. And if you would give that your kind attention, I'm sure the team would be most grateful. And I'd now like to hand over to Robert Abraham and Steve Noble. Good afternoon, sir.

0:48 Good afternoon. Thank you for taking the time to join.

0:53 My name is Steven Noble, managing director and cofounder of Otrato Capital. Otrato Capital is the investment adviser to the SUPERMARKET INCOME REIT, which is The UK's only real estate investment company focused exclusively on investing in UK supermarket property. And I'm joined by Rob Abraham, who's the investment manager looking after supermarket income REITs. Just before we get into the presentation, delighted to announce that we were the winner of the AIC property investment company of the year award for this year. I just wanted to start today's presentation with a brief introduction with the people behind the funds because it gives you some context as to why we're a specialist in this setup.

1:39 Just to start with our chairman, Nick Houston. He was cofounder and CEO of Grantchester and currently serves as a nonexecutive director at Redrow, which is one of The UK's largest and leading house builders. Vince Pryor as well on our on on our board. Vince was previously the head of property at Sainsbury's, and he helped grow Sainsbury's property portfolio from around 7,000,000,000 to 12,000,000,000 over his five year term at Sainsbury's. And on the Etrato side, Ben Green is principal and cofounder of Etrato. Ben has twenty years of structuring and executing real estate transactions. And Ben's completed over five billion of supermarket sale and leasebacks, and we believe Ben has done more sale and leasebacks on supermarkets than anybody else in The UK.

2:33 And another name to note there is Justin King. Justin's a senior adviser to Etrato. Some of you will know that Justin King was chief executive of for ten years until 2014, and he currently sits as a nonexecutive director for Marks and Spencer. Justin loved the idea of what we were doing and was keen to join us as an adviser. And broadly, we put this team together to generate a coverage model for our sector. Now we cover our tenants all the way from board level, be it John Allen, chairman of Tesco's, right the way down to the individual store manager. And that's designed to give us a deep understanding of the sector, deliver a material information advantage, but at the same time, generate a relationship advantage over our competitors in this space.

3:29 Now Rob will take you through the portfolio in a lot more detail later on in the presentation. However, I've got some just key numbers that we can take you through for the year. Sorry. I just lost the presentation. It's back now. So highlights there. 1,300,000,000 is our total assets under management. During our financial year ending June 30, we saw an 8.5% like for like valuation increase in our portfolio. And of our current share price, our dividend, which we increased in line with our inflation linked rent reviews again this year to a dividend of 5.94 p. And of our current share price, we're currently yielding dividend yield of 4.9%.

4:18 And during the financial year, we generated total shareholder returns of 10.9. You may have seen that since our financial year in June, we closed a highly oversubscribed 200,000,000 equity placing in October, and we're currently in the process of deploying that capital, which currently takes our total assets to 1,500,000,000. Just to quickly run you through our financial performance to date, this page illustrates how we've delivered growth for our shareholders and persistently high returns. The chart to the top left shows you the growth in the rental income over the last five years as we've built our supermarkets portfolio.

5:03 And top right, you can see how that enables us to deliver an inflation linked dividend growth. And we announced earlier this year that we increased our target dividend again to 5.9 p in line with inflation. Bottom left, you can see the aggregate growth in the funds NTA since our IPO in June 2017. As we've grown the portfolio from a 100,000,000 to over 1,400,000,000

5:32 today, at the same time, we continue to grow our NTA, which currently stands at $10.08. And finally, bottom right, we can see how we've consistently delivered on our total shareholder return.

5:50 Now I'm briefly gonna take you through an overview of our investment strategy, and then I'll hand over to Rob to take you through the setup in a bit more detail. So probably there's three core pillars to our investment strategy, which underlies what we really love about this sector. The first of those pillars is long inflation linked income. We target leases that provide long unexpired lease terms. Our current portfolio weighted average lease length is fifteen years. And, obviously, this provides a high degree of certainty of income that also grows with inflation. At the moment, just under 90% of our portfolio is either inflation linked or has the benefit of fixed uplifts.

6:38 The second pillar to our investment strategy is omnichannel stores. Now let me explain that. We target stores that operate as traditional supermarkets, but also as last mile fulfillment hubs for online grocery orders, both via home delivery as well as click and collect. Now as more grocery sales go online, how do we, as real estate investors, capture that growth? Well, we do that through acquiring omnichannel stores, and we've got a lot more details around the omnichannel strategy and the economics of omnichannel last mile fulfillment later in this presentation. And the third pillar about what we love about this this setup is just site size. One of the benefits of acquiring supermarket properties is the size of the land we acquire alongside the acquisition.

7:31 On average, our site size is around 10 acres, and we have about a 25% building cover ratio on our site, the rest being the car park. Now what we love about that, of course, is that that amount of land gives us a lot of optionality to explore asset management opportunities in the future,

7:50 and that primarily relates to our ability to respond as the needs of our tenants change and the needs of how they use the buildings change. Most recently, we've seen the investment in online fulfillment in terms of backup house logistics operations. And, again, we're gonna take you through that in the presentation a bit later.

8:17 Just to summarize, as an introduction to what we've seen in sector overall, we continue to benefit through strong headwinds. We've seen a persistent uplifting grocery sales, and operators have proved highly agile in negotiating the impact of the pandemic and the shift towards online grocery. Now this is leading to record levels of investment in the grocery sector, both in the operators through some of the

8:43 buyouts we're seeing in this sector, but we're also seeing significant investment in supermarket real estate, which is having a positive impact on yields. Now as a result, we're seeing a strong property market backdrop with continuous yield compression, and we're seeing plenty of accretive pipeline opportunities. I'm gonna hand over to Rob to take you through the sector in a bit more detail.

9:07 Thanks, Steve. So Steve mentioned the persistent uplift in in grocery sales. And and on the left here, you can see the 9% increase in in annual volumes, which is compared to 2019 as the last normal year pre COVID. But it's important to break that down into its component parts, and it's the online channel that really saw the dramatic growth up 85%. And the primary driver there, of course, is the change in working patterns and the structural shift to growth to working from home. And then it's through in store or or the omnichannel fulfillment network that the increased demand has primarily been met, with volumes with volumes in that channel up a 110%, since 2019.

9:54 Worth mentioning there that we're we're focused on acquiring the top trading stores, and omnichannel is a key pillar of that investment strategy. And and then it makes sense that through the growth in online sales, that then underpins both property values and also income growth for our portfolio.

10:16 Now turning to online capacity. So the vast majority of online fulfillment is through the store networks, and there's been a massive growth, in demand through online grocery. And that's then, of course, been met via a huge scaling up of online in store fulfillment capacity since start of the pandemic. So in in this graph, you can see that increase in weekly online delivery slot capacity across the individual grocers with the pre COVID capacity in the shaded columns and the current capacity in the bold columns.

10:48 Looking at the blue column with the example of Tesco, what's what's quite impressive here is the amount of additional capacity added by its store pick model up a 150%. And Tesco's grown its weekly delivery slots by more than double the size of Ocado's business in that space of time, which might come as a bit of a surprise given Ocado's perception as the online specialist. And then you could see it's a similar story for for us through in Sainsbury's, all driven via store pick fulfillment. And that's something we've seen in our own stores with the operators adding a number of vans and also dedicated warehousing and fulfillment space for online. And that's in contrast to the pure play operators like Ocado on the right there, and you can see, they found it difficult to add capacity at the same pace in in that period.

11:38 And the message is really quite reinforced by both ASDA and Sainsbury's closing two of their online fulfillment centers, including Bromley By Bowie in East London for Sainsbury's during the course of last year. These are often referred to as dark stores, and you would think of it. If ever there was a time to make that model work, it would be in a post COVID world, but those grocers have have decided to instead focus on on omnichannel fulfillment. And and you can see why from from this slide here. So proximity to customers is key, and that's why omnichannel stores are the winning solution. So those that know our story well, I'm sure would have seen these maps before, but we've we've got Tesco's distribution map here. And each blue dot is an omnichannel store fulfilling online orders through home delivery to the local neighborhood.

12:28 And then those red stars dots, clustered around London are their online only fulfillment centers. So these are also known as dark stores. Notably, they're all clustered around London because you need the population density, and, also, Tesco hasn't opened one of those since 2014. And as I just mentioned, Sainsbury's and Asda's were actually seen closing some of theirs last year. And I think just to note, I mean, the core pillar of our investment strategy is we're predominantly targeting those blue dots. It's omnichannel stores that we wanna acquire because you can see how it gives, in this example, Tesco's, a complete UK coverage

13:07 network with delivery times. I think their current statistic is that they can hit 90% of The UK population within less than a thirty minute drive time. And so here's how you can see what that's really translated into for the for the operators. So online is now profitable for the supermarkets. We've seen a massive increase in UK online grocery demand up up from 8% to 13%.

13:39 We've then also seen and that also spiked at at more like 15% last year. And then that's resulted in a a lower cost rapid scaling up of the in store pick model, and that means that significant economies of scale are being achieved. So then you can see how fulfillment costs have greatly improved as a result for the omnichannel model since 2017. So on the left there, you can see broadly the omnichannel model was was similar to to that of the the the fulfillment center model, I. E. Ocado on the left hand side. And, actually, in now 2021, that's that cost has reduced dramatically as a result of greater penetration, of the market. That means delivery drivers are

14:27 traveling shorter distances, and and therefore, it's now through delivery charges of five to six pounds that actually grosses are recovering almost all of the cost. Whereas Ocado, the Ocado model really needs both population density to work and also market penetration. And I think there's a a perception that the the Ocado robot picking model must be much more efficient, but, actually, we see pick rates, that are broadly similar. Ocado's slightly ahead at around a 170 item picked per hour. Sainsbury's, though, they're they're still achieving a 160 per hour with the with the in store pick model.

15:09 And this slide shows you the power of all those blue dots on the previous page. I mean, most of the fulfillment costs for online grocery is in delivery, and you can only solve that by being closer to your customer. And, hence, omnichannel is dominating. And as Rob said earlier, we're seeing the likes of ASDA and Sainsbury's close dark stores because they want to deliver from traditional supermarkets because you can see the cost benefit right

15:39 there as as as utilization increases, economies of scale increases, they can dramatically reduce the delivery costs. Just to give you some numbers, I mean, a man and van is typically around £17 per hour. And if you're doing two deliveries per hour, that delivery charge is costing you £8.50. Whereas if you can get that to what is currently the average for the big four grocers, four deliveries per hour, That reduces your

16:10 costs to around £4. We have some supermarkets in our portfolio. For example, our most recent acquisition, the Tesco in Colchester, they're currently achieving six deliveries per hour. That's their current performance target. And you can see how that drives down the cost of delivery.

16:32 So, yeah, just turning to to the store investments. So one of the benefits of of our portfolio and and owning mission what we call mission critical real estate. So if you think about it from the supermarket's perspective, whether they fill fulfill in store or online, they need the stores to achieve sales unlike other sectors where where online takes takes volumes away from the the store networks. So that means that it's our operators that are making the investment in the stores. So we've got an example here of of one of the stores in our portfolio

17:03 with a a dedicated fulfillment center being added to the to the rear of the warehouse. So we're seeing we're seeing small extensions, number of vans being added, drive through, click and collect opportunities. Click and collect has grown as a channel quite considerably as well. And and it's just a really it improves our store's performance. It makes the store more important to that operator. And, actually, as a result, it therefore drives drives rental growth for us. So it's a a real positive of of owning, as I say, mission critical real estate.

17:40 And I think it's important to note that the property market right now just does not differentiate omnichannel stores from non omnichannel stores. And hence, this is why you need to be a specialist when you're investing in this sector. I mean, that additional capacity you see there for all the online fulfillment from 3,000 orders to seven. I I mean, mean, when you think that that's the weekly increase in capacity and the average online order is a 100, that will drive an additional 20,000,000 of sales volume through that store.

18:12 Now if you think, well, how are rents determined in this sector?

18:17 Well, rents have always been a factor of turnover. And, generally, when rents are set, they're set at around 4% of the store's turnover. So you can see how this online growth through the store will eventually filter through into rental growth, and hence, that's what we love about this sector and focusing predominantly on omnichannel trading stores.

18:44 So just to give you a a brief overview of the portfolio, we've got a a carefully selected high quality portfolio of 35 supermarkets as a and these numbers are as at our our year end results. We've now, of course, added to the portfolio, but we're at 35 stores, at a 4.7% net initial yield and a 1,200,000,000 portfolio evaluation. As I say, we since since announced a further three acquisitions.

19:13 Since then, we're still the portfolio yield is unchanged, but the the portfolio valuation is now up to more like 1,400,000,000 for our direct portfolio. As shown shown on this on the bottom left here, you've got income weighted towards The UK's leading and largest grocery tenants, and that's secured on top trading omnichannel stores. And all of our investments are underwritten by rigorous and detailed financial and property due diligence.

19:43 Top right, the portfolio is underpinned by long term leases. So that's got a weighted lease length of fifteen years. And bottom right, the portfolio benefits from highly visible rental growth, which is substantially weighted towards index linked rent reviews, and that provides an attractive blend of compounding income growth over the next fifteen years.

20:03 So all of these factors together, you can see we're delivering on our strategy of building a platform of high quality supermarket assets, and that provides a strong foundation to our long term income growth. On this slide, we can just see really the benefits now of of that growth that we've achieved over the last year or so. Of course, we've got three more dots to add to this map as well, but really shows both the the tenant and geographical diversification that we're achieving. And no one store in our portfolio is is worth more than five percent now of of our gross asset value.

20:39 Just turning to ESG, which is clearly a hot topic at the moment, and and we've been making some some good progress on ESG initiatives. So in the first column on the left, we've undertaken a materiality assessment, and that's to understand the key ESG topics for both management and also other stakeholders. And to complete this, we engaged investors, tenants, and employees of the investment adviser to understand the issues that are are most important to them. And the the output is that materiality matrix shown here that identifies

21:10 the top eight most important items for both stakeholders and the company leadership, and that showed a high level of correlation as to what was considered important. Onto the left column here, EPC scores also attracts a a lot of attention. And as you can see, 70% of our portfolio is EPC and above, and we only have one property with an e rating. And also worth mentioning here, coming back to the point on mission critical real estate and also the fact that our grocers have very ambitious net zero targets, we actually see a lot of investment in our stores, whether that's energy efficient lighting, refrigeration. That means the EPC scores naturally improve over time as it's in the operator's interest to do so, which is clearly a huge positive of of having the tenant base that we do.

21:59 And then finally, moving on to governance. The company's been awarded an EPRA Gold governance award two years in a row, and we've been continuing to work with the the SUPERMARK to enhance the governance framework of the company. I'm gonna give you a quick update and take you through, for those who are new to it, our joint venture portfolio. I'll take you through the details shortly, but big picture to this because it is quite complicated, is that we effectively acquired an interest very cheaply on a portfolio of stores, 26 in total, which had a two year lease to same spree. Now our conviction at the time that we entered into the joint venture was that Sainsbury's wanted these stores for the long term. That's what's happening.

22:44 And when we exit, we'll exit with a benefit of a twenty year lease to Sainsbury's, and that will be positive to the MTA of SUPERMARKET. Just a quick overview of the detail. The structure, it has 26 Sainsbury's stores.

22:59 We have a 25% interest in that structure with our joint venture partner, British Airways, who also own 25%, and the other holding is held by Sainsbury's itself. Our running return on this joint venture, our annual return, is 11% per annum. Now our investment will monetize in 2023 in two ways, either Sainsbury's buying back those stores or entering into a lease renewal on on the stores in the portfolio.

23:37 In September, Sainsbury's exercised its option to buy back 13 of the stores, and Sainsbury's has an option to purchase a further 10 stores, which it can exercise between December and January. Now we expect Sainsbury's will exercise most of the of those purchase options. As I said, we'll then receive the sales proceeds in around mid twenty twenty three.

24:05 And as I said before, the option price for Sainsbury's, the price they have to effectively buy those stores, assumes a fresh twenty year lease to Sainsbury's. And given yields on twenty year supermarkets have tightened materially, this will be positive for the NTA of SUPERMARKET. Now the current leases will continue on all the stores until that date in 2023. So we have continued to earn our 11% running return on that joint venture. And the full impact of Sainsbury's the purchase options, well, that will come through most likely in our half year results in December, which we'll announce around March. And then because if the remaining options are not exercised until January, well, on those other 10 stores, it will probably come through in our results

24:57 announcements in June 2022. Just to quickly take you through debt, I mean, it's one of the things we we love about the fund is that we believe we have one of the lowest cost of debt in the real estate sector. So broadly, we target leverage of between 30 to 40% over the long term. Our running interest cost or debt cost is around 1.9%. As I said, we think we're one of the lowest in the sector. And primarily, that makes sense because we have very strong tenants within our portfolio, and we have the benefit of very long bank ticket leases. We do operate your funding structure. You can see there's some traditional clearing banks as well as German banks who provide our underlying debt, and we're also in the process of exploring other for our debt financing, which includes moving to potentially an unsecured funding model in the capital markets, which will give us a bit more duration on our debt term. Currently, unsecured debt term is four years.

26:05 I just wanted to take you through the supermarket sector in a bit more detail. It's frustrating for us not to have a representative transactional yield series in the market. And what do I mean by that? Well, I mean, on stores that are in our target market, predominantly omnichannel, long lease lengths with the benefit fixed or inflation linked up lists. So as a result of that, we've been tracking individual transactions since 2016 that represent our investment market. And in the graph you see here, we've highlighted all transactions which are representative of that investment market. Ten years unexpired lease term benefiting from index or inflation uplinks. And please note this is the whole market, not just our transactions.

26:53 Now this allows us to create a yield series. Effectively, this is the line of best fit through all those transactions. And as you can see, investment yields have been tightening from 5.3% in 2016 to 4.5% today, illustrating the impact of valuation increases from growing investment demand in this sector. By the way, this data is available on our website for anybody who wants to go on and download it. Now one of the other things we love about this sector is we can show you the differential between supermarket property yields and bond yields. And when we add the yield on Tesco's corporate bonds as shown here in blue, we can see that despite the yield shift we're seeing on supermarket property, the relative value from supermarket real estate has significantly improved since we launched the fund back in 2017.

27:55 On a risk adjusted basis, our investment strategy has never looked so compelling. You can also see here on this graph, on the left, we've got vendors of supermarket, and on the right, we've got purchasers. You can see over the last three years on the total column, there's been over 5,000,000,000 of supermarket transactions taking place. And what we're seeing is a rotation of capital from a generalist investor base to specialists. You'll see many generalist property investors in that vendor column as well as some more traditional institutional funds, open ended funds on that list. They've been good hunting grounds for acquisitions for us primarily as they're forced to sell either due to a rebalancing of their portfolio.

28:47 And it is crazy that some funds still put supermarkets in a retail asset classification and others who have been for sellers primarily in order to produce liquidity into their open ended fund structures. Now on the other side, you can see the buyers on that within the supermarket investment space. One name to point out there, the ultimate insider, Tesco's, obviously, they've seen that previous yield graph that I showed you, and they're well aware of the relative value of borrowing in order to buy back supermarkets. And hence, they have been participating in the market. But they tend to quietly participate in the market rather than doing any kind of large scale buybacks because of the obvious impact that that would have on investment values.

29:39 And other names to note there, REALTE INCOME, which is a large US specialist REIT, which has been a big buyer, as well as some other specialist names there, such as London Metric as well as BlackRock. Again, evidence of this rotation of capital out of generalist funds into specialist investment sectors. Now in many ways, as Rob's noted, 2021 has been an exceptional year for UK grocery, and private equity players have obviously been attracted to buyouts within the sector. And it's not hard to understand that given the mission critical nature of grocery assets, their significant real estate backing within their portfolios.

30:24 The sector still has considerable freehold real estate values. The businesses are highly cash generated. They're very agile in terms of their overall business model. And, of course, all the big four have a dominant online market share, which is relatively unique. Now how do we think about all of this m and a activity within the market? Well, firstly, grocery real estate, it's called food infrastructure, and asset selection is absolutely critical in this space. And we use our information and relationship advantage, which I I spoke to you about at the start of this presentation, in acquiring high quality stores with growing sales, both in store as well as online.

31:12 Now that provides a strong foundation to long term income and capital growth at the asset level. And in addition, we don't expect this buyout activity which is taking place to have any kind of disruptive impact on the supply and demand dynamics within the market because we don't expect to see significant sale and leaseback volumes of supermarket real estate given the low cost of debt finance in the sector. As you've seen previously, debt is far more cheaper than property yields when it comes to financing for any private equity buyers in this space. And just to sum up before we move to questions, I mean, the sector itself has a lot of favorable tailwinds.

32:04 We've seen sustained grocery sales growth. The initial jump we've seen because of the pandemic, that's continuing, and that's a reflection of structural shifts we've seen in working habits with people working from home more. Omnichannel real estate has now established itself as key to the online grocers, omnichannel, and online model. Currently, the omnichannel model fulfills over 80% of all UK online grocery orders. And if we take a card out of those numbers as the only pure play online grocer, that number actually jumps to 90% of online grocery. We're gonna come out with more news on the Sainsbury's joint venture in January as we will see the impact of their final option exercise date in the remaining 10 properties.

32:56 Broadbrush, as we expect higher inflation to feed through into The UK economy, that's highly favorable for our investment story because primarily, the grocers have been very efficient in passing through any inflation cost pressure in their supply chain. And, of course, that filters through eventually to ERVs and rental growth in the sector. At that point, I think we'll stop, and we'll turn to q and a, Simon. That's great. Robert, Steve, thank you very much indeed for updating investors this afternoon. Ladies and gentlemen, please do continue to submit your questions using the Q and A tab on the right hand corner of your screen. But just while the guys take a few moments to review the questions submitted already, I'd like to remind you that recording of this presentation, along with a copy of the slides and the published Q and A, can be accessed via your Investor Meet company dashboard.

33:44 I'd also like to remind you that your feedback is important to the company. And immediately after this presentation has ended, we'll redirect you for the opportunity to provide feedback in order the company can really better understand your thoughts, views and expectations. Robert, Steve, we did enable to pre submit questions. We received a a question ahead of today's event, which if I may start off with. It reads as follows. What are your plans with regards to shorter lease assets within the portfolio? I can start with that. We've only got a a few short leased assets in the portfolio. Primarily, our investment what's underlying the investment story is the regear potential on those assets. I mean, again, what we're fundamentally underwriting is the trading performance of the store. And therefore, when we do experience investment opportunities on shorter dated leases, they can obviously be acquired at higher yields primarily because of the uncertainty around the regear lease. However, our underwriting is designed to evaluate the trading performance of that store.

34:48 We know where traditionally rent turnover ratios exists. So we can kind of work out where we think that regear rental needs to be. And when we've got a high conviction that that adds a lot of value to shareholders, we will buy short dated leased assets. I think the best example of that is the returns we're currently making on our joint venture investment. That was a short dated lease portfolio to Sainsbury's. It was too big for us to take as a whole, so we did it as a a joint venture with British Airways pension scheme. But that's proving to be quite valuable for shareholders. We'll always maintain a weighted average lease length in and around fifteen years. So when we see opportunities at the shorter end of the curve, that will be very much based on value growth, but then that will get balanced by buying longer dated leases to make sure we maintain predominantly a weighting of around fifteen years in lease term.

35:49 That's great. Thank you very much indeed. If I could ask you to open up the Q and A tab on your screens, please, if you'd be so kind. And thank you firstly to all the questions that have been submitted by investors. And perhaps if I may, if I could just hand back to you to read out the questions and give a response where it's appropriate to do so, and then I'll pick up from you at the end. Sure. No problem. I'll act as compare, and I'll put Rob on the spot for these ones. So if we take the first question from Simon s, good question. I noted that your last acquisition in was a 4% net initial yield, and that is rent reviews just happened. I thought 4.25 was key price. So interesting about the store.

36:35 Guess, Rob, do you wanna take that? Yeah. So so this one, we we really like. So it's it's got a large omnichannel operation at the store. And and off top of my head, there was 12 to 14 vans operating in in actually what was a relatively small catchment distance by drive times. But within a fifteen minute drive time of that store, there are 1,000,000 people. So a huge opportunity, for for online sales, and there weren't any other Sainsbury stores doing anything like that for more like thirty minutes. So, clearly, the Canuck store has a has a large catchment, and that provides an opportunity for future sales growth. And then also, I'd just comment on the on the 4% net initial yield that we reported. We always report based on standard purchaser costs, which are standard for the market of 6.8%.

37:25 This was actually an acquisition of a corporate vehicle. So the the purchase costs were much lower, and therefore, the actual yield to SUPER was more like 4.2 to four and a quarter percent. So so, yeah, absolutely in line with with what we're seeing elsewhere, but but a good question and well spotted. Take the next question from David H. Other than inflationary growth and acquisitions, do you see the possibility of your own property development such as warehousing for online deliveries as well as new supermarkets? I'll never update the the development side. But, look, broadly, one of the things that's great about investing in this sector is that the sale and leaseback model, when they were originally done by the operators, they put twenty five year leases on them, and they were FRI leases, what's known as fully repairing and insuring.

38:20 So, actually, we have no servicing. And any investment that the operators wish to do on the site, they do that themselves. So it's almost as if your tenant is paying for the refurbishment enhancements to the underlying real estate. I mean, that's very convenient for us as a landlord. So the example we took you through in the presentation, the Sainsbury store down in Ferndale, the enhancement to the online delivery and and the additional capacity was all funded and paid for by Sainsbury's. We have to consent as a landlord, and, of course, that's something we're delighted to do. It will add to sales in the store, and that will eventually filter through to rents over the long term. So primarily investment in the stores are covered by the operator.

39:09 In terms of looking forward to a development pipeline, we don't see too much, Rob. I don't think that's core to our focus. Yeah. And and what I'd say there is the economic upside from from development has certainly been eroded in recent times. They're they're typically of smaller format and therefore smaller lot sizes. And so there's a a number of parties who are participating in that. But what you one thing you don't really see very often anymore is is large format supermarkets and and certainly the omnichannel stores. And, actually, one of the things we really like about our portfolio is the strong and long trading history. So we can point to quite often operators being in in place thirty, forty, fifty years, and and the the catchment suited them. There there's a large population, and therefore, the trading is very strong. It gives you much greater conviction on on what the the potential we will be at the end of that lease.

40:05 With a new build store, you you don't have that. And as I say, there's there's not really the economic upside for doing it, so we don't see we don't see that having a large role in our portfolio. But it's not to it's never say never, but but it certainly isn't gonna become a a material part of the business for us. Next question from David H. Pre COVID, it seems that supermarkets were willing to turn away from much larger stores. Is this still the case, and how are you handling that regarding the portfolio? I mean, I can say that one. David, it's a good question. I mean, you're right. There was a perception that stores were too big, and I think that was right when online grocery demand was very low. However, you know, the store pick and the omnichannel model for the grocers has always been core to their thinking.

40:56 And they told us very early on that, look, as demand grows, we will need the additional space for the additional capacity to do online fulfillment. They always knew that the economics of online are a factor of bringing down the delivery costs, and that's only done through proximity to customers. So when you think about the delivery or the logistics challenge of grocery, it is incredibly complicated. You've got maybe thirty, forty different products to deliver, potentially three different temperature zones. You can't shove it in the letterbox or stick it behind the bin when your customer's out. You have to hit a one hour delivery window. And because of the logistics challenge, that generates costs that's only sold through proximity to your customer, and having the additional capacity in the real estate through larger stores enables them to operate a last mile omnichannel fulfillment model, which is now profitable, which gives them a strategic advantage in The UK, and which has enabled them to capture an online market share, which is greater than their physical market share.

42:11 Now if you think about any other sector where the incumbent has a dominant online market share as well as a dominant physical share, I find it hard to to find other comparable sectors. Usually, physical stores are are are hit quite hard by the likes of Amazon, and that model kind of works from centralized fulfillment if you can shove it behind the letterbox or stick it in the bin or behind the bin. But very different with groceries. Regarding the future, I mean, you saw all those blue dots for Tesco's. They're probably well, we think they've got the capacity they need across The UK for their large stores. So we don't expect to see many large stores being built. That just adds to the scarcity of the additional stock. The types of new build supermarkets we're gonna see are probably gonna be smaller, and they're just infill pockets of demand that they can't cover through their existing stores then. And and just to touch on that on the large format. So one of our recent acquisitions with this was a Tesco in Prescott, and, and that's a 140,000 square foot store.

43:21 So it absolutely ticks that box of the large format that that quite often we get the question as to what the future of those stores look like. And our acquisition, we entered into a new fifteen year lease with Tesco, so we regid that store to an annual CPI lease at naught 4% rent reviews. So, yeah, absolute conviction from Tesco that they they still see a a a big role for these stores in their network, and it was operating fourteen, fifteen vans in the local area, very dense population, big online trading. So, yeah, absolutely a key part of their their strategy still. A question from Phil g. This is an information question. Please, can you confirm what is the weighted average cap percentage for inflation linked rent increases?

44:07 That's easy. We're currently 4%, Phil. It's the cap on our our inflation. We're floored at zero. Some of our leases are are floored at 1% with an average 4% cap. And who are the nonfood tenants? Good question. I mean, nonfood is a very small part of our overall portfolio. It's around 3% in terms of value. Obviously, when we acquire really good trading supermarkets, there's sometimes non grocery operators that on the site, enhance the on-site offer. Predominantly, our tenants are on the nonfood portfolio is home based. That makes sense because home based used to be owned by Sainsbury's, so you tend to find them co located on sites. B and Q is another name. B and M without are one of the tenants in our non food portfolio.

44:59 It is small. We don't directly target non what we call non grocery operators, but sometimes they come as part of the site acquisition. And, of course, controlling the site is what's important for us. So where we think site control is incredibly important to the long term operation of the supermarket, it's advantageous to make sure we control the whole site rather than just acquire the supermarket element, not acquire the nonfood element, and end up on some car park sharing arrangement. Obviously, that limits our flexibility if the operators come to us and say they wanna do more investment in online. They want more of the logistics operation. We wanna make sure we control that. So, hence, we acquire the non grocery element at the same time.

45:48 Question from David h on ESG. This is a good question. Actually, very topical question. Yeah. In the private residential sector, escalating requirements legislations coming into place, which do not let landlords rent out property under a c EPC grade. Are there the same restrictions on your portfolio? How are we handling that refurbished sale, question mark. Brock? Yeah. So, yeah, again, very topical. So there there's a government consultation on at the moment. And but, yeah, absolutely. It looks like that's that's the way things are moving to, and and there will be a minimum requirement to achieve a b. As I mentioned earlier in the presentation, we we we benefit well, we're fortunate that our tenants are are first and foremost so committed to the net zero agenda themselves, but also that they make significant investments in their own store estates as they are so mission critical. So there's there's an ongoing program of investment, and we we see many examples in our portfolio of of stores that were previously scored an e improving to a b, and we've not had to do anything. That said, we have done a review of our entire portfolio, and we see the the estimated cost of of if we had to incur it, if it wasn't incurred by the tenants, the the estimated cost of achieving compliance and getting every store to a b would be around 8,000,000.

47:12 So in the context of a a £1,400,000,000 portfolio now, it we we don't see that as a material sum. And and as I say, we think over time, our EPC scores will continue to improve on the estate. A good question from Matt p, and I'll add Paul h to this as well. Do you see small store urban express delivery models such as GetDar, Weezy, Zip disrupting the omnichannel supermarket? And follow on question from Paul, any development on the urban fulfillment centers Tesco's alluded to? Two great questions linked. So in terms of the Urban Express model, no. Simply, we don't see that as a threat to the omnichannel market. That's incredibly niche.

47:59 It's designed towards a particular demographic, predominantly London. I think if you talk to a lot of them, they say most of their sales are are booze and desserts, stuff that's kind of very impulse buy purchase when it's not convenient to go to a store. We don't think it's a growth model. It certainly doesn't have the same kind of strategic advantage that you think the likes of Tesco, Sainsbury's, has to have by being able to offer a full range grocery product line across nearly all of The UK and the amount of capacity that they can offer as well as driving down the overall fulfillment costs to the level they have. I just can't see the smaller operators competing with that. And, of course, where that market is disruptive on a localized level, predominantly in London, where the operators are already responding to that either through their partnerships with the likes of Deliveroo or Justy or, alternatively, introducing their own one hour delivery service.

49:07 But it will be very, very niche. And urban fulfillment centers, good question. Tesco's are putting in five at the moment. They've got a program to install about twenty, twenty five over the next five years. Look. Look. In time, we expect to see this kind of mechanicalized fulfillment going into the back of house of supermarkets and probably on all those blue dots that we showed you on the previous page. It will take time to install it. It does provide additional capacity to what they currently have. So I think the speed and timing of moving from a manual pick operation to an automated one will largely depend on how quickly online grocery grows. If we continue to see an acceleration of growth, you'll see an acceleration of the investment into urbanized fulfillment in store in order to get the productivity and capacity benefits.

50:03 If online continues to grow relatively slowly, I think it would take a lot longer to install. But it is something we think we'll see over the longer term. And we're really excited about it, by the way. We love PropTech. And when you look at the additional capacity that they can generate through the store as well as the additional fulfillment for landlords like us, it just adds to the value of the asset because it will increase the overall sales capacity of that asset. Just looking at another question. Specialist fund segments means that your share price has depressed a little. LXI, for instance, trades at a 4% yield. You're close to five.

50:49 What can you do to move from a full listing? Do you make a great player of your nonfood store tenants, pets at home, etcetera? So two questions there from Simon. Do you wanna take specialist funds for? Yeah. So it's it's something something that we've we've been looking at in the past, and and, actually, we've we've kind of been putting together some arguments as to why we think it's not an appropriate place for us to be. Clearly, in in the past, we had quite a small portfolio, limited number of stores. It's now well diversified. And so, actually, we think we're we're far far better suited to a a premium listing. So it's a good question. It's something that's in our kinda longer term term pipeline as a a goal. But yeah. Yeah. Absolutely. We we feel like we're we're probably in a place now where we can put together a a compelling argument.

51:42 Thanks. And the last one around making a greater play of nonfood to boost the share price. I mean, look, it's a small part of our portfolio. We are totally focused on supermarket acquisitions. So the nonfood or nongrocery element will only be incidental to acquiring a really good supermarket. We We can can buy well, and then it should yield on our nonfood portfolio was around 9%. So it's quite yielding. We buy well, but it will never be a a major feature of our investment story. Just conscious of time, I do wanna pick up a question from Charles, which is a great question, and then also from Miguel. Charles asked, can you provide any comment on the recent IPO of the Trato On-site Energy any potential beneficial links between Toronto On-site Energy and SUPERMARKET INCOME REIT. I mean, it's a good question, Charles. Just for those who don't know, we did launch Toronto is the investment adviser to another fund which released recently launched, which is a Toronto On-site Energy. That's a fund which is exclusively investing in rooftop solar programs.

52:51 And hence, its stock market ticker is roof. There is crossover opportunities within SUPER. We have programs with most of our tenants now to explore and start installing rooftop solar energy on our supermarket assets. That will improve the environmental sustainability of the site. It also provides low cost electricity to the operators. So it's a win win for both the landlord and the tenant. Relatively small capital investment on each of our sites. It's generally between 200 to 300,000. I mean, the board of SUPER would rather us focus on, you know, the 50,000,000 acquisitions on on supermarkets and installing super solar panels on the rooftops.

53:38 There's a level of specialism there that goes beyond just property. Roof has a specialist team which we've recruited. They'll be exploring rooftop solar installations across many assets across The UK, but there is obvious synergies between SUPER and ROOF. And we hope and we expect that this will enable us to accelerate the rooftop solar installation across SUPERMARKET's portfolio going forward. And then the question from, which is a good question. What's the rationale for grocers to do stand on leasebacks when omnichannel stores are so valuable and the gap between transaction and yields and debt is widening?

54:24 I mean, it's a good question, Miguel. I mean, the short and sweet is they're not doing any more sale on leasebacks. The original stock that's in the market and that we're targeting, well, that was done about ten, fifteen years ago on twenty five and thirty year lease terms. With the rationale for doing sale and leasebacks in the past was the cost of funding. There was a point where property transactions were cheaper than debt transactions. There was also an accounting play to a lot of sale and leasebacks because for those accountants on the call, a settlement leasebacks used to be off balance sheet source financing. Of course, the accounting rules have changed since then, and now all the leases are effectively capitalized on balance sheet as as debt obligations effectively.

55:18 So in short, we don't expect to see any additional sale and leasebacks come into the market. In fact, there's an actual net reduction because I showed you on the supply and demand tables, Tesco's are now buying back their stores. As you would have seen with our JV, Sainsbury's are in the process of buying back their stores. So we're actually seeing a net reduction of in this investment market rather than an increase in supply. And, of course, that just further adds to the capital value of the real estate portfolio that we're building. We think that our our total investment market, I. E, leasehold supermarkets is around 30,000,000,000. If we can grow to be 15% of that market, where you can see how our gross assets could grow to about between 3 and 4,000,000,000.

56:09 That's probably going to a maximum level of growth for us. We've got four more minutes. We'll try and squeeze in another question. Apologies. I'm just gonna run through them. We're getting quite a few questions coming in. Is there development upside on our portfolio? For instance, smaller car parks, I think this is redeveloping car park space, Rob. Would you share that with the supermarket operators? Yeah. And I I think Stephen touched on earlier. So, typically, our stores have been fully demised to the to the tenant, and there's full control there. So it means that any redevelopment, we would do, see if that's kind of drive through restaurants, and and and those kinds, then then actually we need, we would need to work with the operators and therefore share share the upside, something that's, been one of the developments of COVID. This is something we were looking at back in 2019.

57:14 One of the developments there has been, obviously, the increase in grocery demands, and therefore, car park capacity has meant that store managers and operators are far less willing to give up, give up the space, for the sake of a drive through restaurant. So, actually, yeah, their their main focus now is ensure ensuring the operational success of the the supermarket rather than any kind of incidental smaller revenue from from those kind of asset management initiative initiatives. That said, we do have a couple of larger sites where we we've got more control, and and therefore, we're we're still exploring those those opportunities. Yep. And we can get close to a 100% on questions if I if I get these two done in the the last two minutes. A question from Charles b, which is actually a good question. Your present presentation points a very positive picture.

58:01 Can you provide an overview of the potential risks? I mean, in short for us, on the fund side, obviously, we are a leveraged fund, so there is a risk associated with the interest cost on our debt. Obviously, there is a view that interest rates will rise in the future. That would increase our finance costs beyond our existing debt, which is predominantly fixed, has a term of four years. I think the answer to us is that, you know, traditionally, there's been a correlation between inflation and interest rates. So therefore, if there is an increase in interest rates, it's responding to the increase in inflation. So there's a level of natural correlation there. We manage that through our treasury policy and fixing debt as much as possible. We're looking at the bond market as well as another source of of fixed income borrowing.

58:51 Primarily, the difference between our inflation growth and our borrowing cost is one potential risk, but we think we can manage that. Another question from Andrew. S, will you look to acquire supermarkets outside of The UK? No is the answer. We're incredibly simple. We wanna keep it that way. So we're predominantly focused or or only focused on UK assets. And last question, which I'll let Rob handle, high inflation concern. Is that a concern of the three to 4% cap level? Yeah. And I I think the the short answer to that is is no. Obviously, we're we're we're best placed to benefit from a a 90% weighting of our portfolio to to which is linked to inflation rent reviews.

59:43 So, therefore, we're we're kind of better insulated, from that. Clearly, if inflation runs for a sustained period above that, then then it has, has the potential to erode over the long term, but we're we're we're expecting it to be more more transitory in in its nature and and certainly, more in the near term. But our portfolio, yep, should should benefit from a from a substantial increase in in through the rent reviews this year. But, Steve, I might I might jump in at this point to keep your 100% success rate on answering all the questions because I'm sure others will pop in. If they do, obviously, we'll make them available to you. But but thank you to everybody for taking the time to submit questions. Rob, Steve, I know investor feedback is important to you guys, and I'll shortly redirect investors to give you their thoughts and expectations.

1:00:29 But before doing so, wonder if I could just hand back to you, Steve, just for a few closing comments just to wrap up with. Yep. Thanks, Mark. I mean, look, thank you all for attending. It's been a fantastic year of growth for us and the funds. Both the increase in the size of our investment assets has helped us further diversify the portfolio, and we've got some exciting developments coming forward next year, both on our debt funding, both on our Sainsbury's joint venture. I mean, the sector has a has a number of favorable tailwinds to it, and that builds into our primary our primary view that we will continue to see further value and rental growth in this sector going forward. So we're really excited about what the future holds. That's great. Robert, Steve, thank you very much once again for updating investors this afternoon. Could I please ask investors not to close this session as we'll now automatically redirect you for the opportunity to provide your feedback in order the management team can really better understand your views and expectations?

1:01:26 This will only take a few moments to complete, but I'm sure will be greatly valued by the company. On behalf of the managers of SUPERMARKET INCOME REIT PLC, we'd like to thank you for attending today's presentation. That now concludes today's session, so good afternoon to you all.