Supermarket Income Reit Share Discussion Threads

[williamcooper104] 07/1/2023 08:48

It's just basic core corporate finance - Modigliani-Miller Theoremhttps://corporatefinanceinstitute.com/resources/valuation/mm-theorem/That there's a strong cultural bias (of which I've been more guilty than most) of using debt in CRE doesn't change that A lot depends on the nature and quality of the debt as much as the quantum Eg US REITs have no market value based covenants; that over the cycle makes a huge difference - and it's one of the reasons why US REITs have killed UK prop cos on historical performance

[jonwig] 07/1/2023 08:34

Skyship - whilst I agree, I think, over-leverage caused the downturn of 2007-09 to be so destructive. You could argue that leverage gives back the gains from the up-cycle when the down-cycle begins. We don't know yet how the current one will develop. (Voids just exacerbate the situation: borrow at X%, rent out at 0%.) How much is "over-leverage" this time round?

What we need is a test case: an unleveraged REIT. But we'll never get one, because it wouldn't suit managers who measure their fees in terms of gross assets.

[skyship] 07/1/2023 07:46

WC - "In theory no REIT should be leveraged"

Don't wish to take issue with such a prolific poster on the REIT threads; but sorry, but I've seldom read such an absurd statement. I suspect you've just tossed that out to be controversia. Still, has to be challenged.

The reason for propco leverage is that the basic propco business model is to borrow at X% and rent out at 2X%. At heart it is a very simple proposition.

A lot goes on behind the scenes of course, active asset management is an essential element of the business. But the basic formula of using bank debt to buy, rent and pocket the difference is beautifully straightforward. Always has been; always will be.

[orinocor] 06/1/2023 15:47

I'm expecting a quarterly dividend announcement next week so this weakness appears like a good opportunity to take a position.

[williamcooper104] 21/12/2022 12:11

In theory no REIT should be leveraged, as going on first M&M corp finance principles, the only advantage of debt over equity is tax deductibility (as more debt just increases cost of equity so doesn't lower overall capital cost), given REITs don't pay corp tax thus no reason to be levered Two reasons why they are; 1 cultural - we are all leverage junkies, even if de-levered most REITs/real estate investors are just like the alcoholic not drinking still being an alcoholic 2 with QE debt was mis-priced - eg spread over debt cost v unlevered IRRs was c600bps or 1.5x a normal equity risk premium, but if the spread is only 200bps then it's clearly not mis-priced

[williamcooper104] 21/12/2022 12:04

Yep; LTV post Sainsbury's cash is c20 percent Acquisitions possible; depends on yield, impact on dividend, cost of debt once current facility expires (remember loans should refinance at last a year ahead of legal maturity) Plenty of options; priority likely to be dividend coverage

[rik shaw] 21/12/2022 11:54

Not sure that's the case as they reported in their annual results '100% of drawn debt now hedged at an effective fixed rate of 2.6%'
Note also that their LTV (and income) will potentially reduce when the sainsbury money is forthcoming in 2023 (unless they choose to commit the money to new stores)

[mindthestash] 21/12/2022 09:54

Morning all. I'm thinking of getting into this.
I hold EPIC NRR AEW in property and have done for a while. Recognise a few names in this thread.

SUPR looks solid.
Concerns are more about
1 SUPR still buying as market weakens
2. my guess is that the underlying assumption of SUPR has been that the spectrum of interest rates will fall relatively quickly (2 years) and they dont want to 'fix'.

Interested in views; many thanks

[chucko1] 16/12/2022 14:44

Yes, and Goldman reduced their outlook for SUPR, yet GLG reduced their short.

I just added.

[jonwig] 16/12/2022 07:07

In today's IC, the most likely resilient property sectors for 2023 are supermarkets, student digs and warehouses.

[ammons] 15/12/2022 20:40

If the shares fall to that figure then I will buy a few more and forget about them while I collect the divis.

[bathcoup] 15/12/2022 16:56

Goldman Sachs cuts Supermarket Income REIT price target to 97 (108) pence - 'neutral'

hxxps://www.morningstar.co.uk/uk/news/AN_1671096354390506400/london-broker-ratings-goldman-sachs-likes-big-yellow-great-portland.aspx

That's a sizable "cut". It'd be interesting to know their thesis though I'm not a share holder.

[ammons] 12/12/2022 14:27

Couldnt resist some of these at 101p. Nice and boring with a good yield paid quarterly to supplement my pension. :-)

[williamcooper104] 09/12/2022 18:51

Yep 8-9 with low volatility is what you need as a good solid portfolio anchor

[williamcooper104] 09/12/2022 18:50

https://www.savills.co.uk/research_articles/229130/336414-0Food store yields tightened 25bps from 5.5 to 5.25 from Oct to Nov - 5/low 5s feels about right in current rate environment

[chucko1] 09/12/2022 17:07

Seems a perfectly reasonable analysis.

The market is providing some headwinds that I suspect will dominate in the short to medium term:

1. a shorting hedge fund (though that often means very little - has anyone found GLG's thesis on this?)

2. Relative value versus linkers - still great, but it would have been foolish not to be concerned with the real yield of UK linkers - as we so clearly saw a few weeks back - and I still think there is room for further negative price behaviour. Much more so in the ultra long-dated, so the effect now on SUPR should be more muted.

3. Unpredictable market factors such as LDI and otherwise poorly positioned market participants. The outgoing tide will probably uncover many more.

But if there was one asset I would be happy to hold for a long period, SUPR is near, or at, the top of the list. I think it has good chances of making an annualised 8-9% from here for the next decade or so, and possibly more in an environment where inflation was sticky at around 4%. So a real return of up to 6% versus Gilts at 0.25% or so - and with relatively moderate volatility.

[williamcooper104] 09/12/2022 15:07

Good article in React on the sector Supermarkets will be the deal of the day for investors in 20238 Dec 2022 | by Tom EdsonAs the big four becomes the famous five, the sector is entering what could prove to be a watershed yearTom Edson's profile picTom EdsonGUEST WRITERTom Edson is a partner at Font Real EstateAt the beginning of this year, those of us involved in the buying and selling of grocery-backed property were taking stock of the strong volume of sales in 2021 – around £1.85bn, which was on par with the previous record year – and reflecting that this level would have been even higher if there had been more assets available.Less than 12 months later, although volumes have been way down in the light of the global and domestic shocks that have happened in the interim, the supermarket investment sector is now entering a fascinating period that may prove to be a watershed moment.If for nothing else, this year will be memorable for being when the "big four" became the "famous five". Or, if you want to be more prosaic about it, when Aldi supplanted Morrisons at the top table of grocery heavyweights. A discounter replacing a traditional operator was a signal moment for the sector.Despite the difficult economic backdrop, operators across the food retailing sector remain active, and particularly the smaller store format operators. Lidl, Aldi, Iceland's Food Warehouse brand and M&S continue to expand progressively on retail parks and roadside locations looking for new stores of 10,000-25,000 sq ft.Aldi overtook Morrisons in 2022, becoming the UK's fourth biggest supermarket chainM&S has plans for a further 100 foodhalls – many of which are relocating from existing high street stores that are earmarked for disposal – while Lidl and Aldi each have requirements for around 50 new stores a year for the foreseeable future. The competitive tension generated by this "race for space" has led to a rise in rents.Given that most operators are offering a minimum 15-year term certain with guaranteed rental uplifts at review and excellent covenant strength, yields in the sector continue to look strong when compared to all other retail uses and, indeed, most other property asset types. Hyperactive AsdaIf there was an award for keeping busy this year, it would certainly go to Asda. The Issa brothers haven't let the grass grow under their feet since they joined forces with TDR Capital to buy the chain for £6.8bn. They've struck a £1.7bn distribution leaseback deal with Blackstone, gone on a store expansion drive, introduced new concessions into stores and added an additional 132 filling stations to their UK footprint.The business is becoming well known for its agility and speed of decision-making. The current environment of a disrupted economy and customers considering their shopping options may be where these qualities prove to be a distinct advantage in terms of adapting to a changed world.Leasebacks make a comebackIn recent times, the only activity in the supermarket sale-and-leaseback sector has been operators looking to buy themselves out of the onerous liabilities they took on about a decade ago. That has now all changed as a need to bolster the supply of working capital has increased in the face of higher food prices, margins under pressure and a much tighter debt market.This method of raising capital is not new in the grocery world. Sainsbury's and Tesco embarked on a major of programme of store leasebacks about 15 years ago, although these ground to a halt in 2013. Waitrose also conducted a small leaseback programme in 2020 while Asda sold a portfolio of distribution centres with this structure earlier this year.Truck, Vehicle, TransportationMorrisons launched a £150m sale-and-leaseback portfolio of five stores in OctoberIn terms of actual store leasebacks this year, Sainsbury's was first to test the water with a £500m portfolio which was withdrawn after a deal with LXI REIT fell out of bed in September. At time of writing, it is not clear when, or if, this portfolio will be brought back to the market.Not deterred by this, Morrisons followed up on the conclusion of distribution leasebacks, by launching a £150m sale-and-leaseback portfolio of five stores at the end of October. While no deal has yet been agreed, if it proceeds it will be the largest asset disposal – other than a small package of leasebacks in 2014 – in the business's 123-year history.More pertinently, it will be a test of market sentiment and would be the first major transaction since the chancellor steadied the ship with the fiscal plan introduced in the autumn statement.Back to basics?As we head towards the year-end, it will be interesting to see to what extent the essential nature of grocery retailing reasserts itself in the mind of investors.The pandemic proved that even at a time when most retail capital markets sub-sectors seized up, the demand for supermarket assets continued and indeed deepened. Ultimately, we all need to eat and although the seismic shocks of this year – from Ukraine to the brief but devastating emergence of Trussonomics – dislocated the normal flow of capital into the sector, we expect this to be resumed to a large extent during 2023.This is not to ignore the very real challenges that the sector's operators face: Kantar reported in November that UK grocery price inflation had hit a record 14.7%. But while that puts obvious pressures on margins, Kantar also noted that that take-home grocery sales rose by 5.2% in the 12 weeks to the end of October – the fastest rate of market growth since April 2021.That would indicate a progressive normalisation and the operators must now be looking to try and weather the storm through to next spring when inflation is projected to fall to single digits again."Grocery-backed assets have a track record of being resilient even in times of economic stress"In the midst of this inflation, the discounters are likely to be less affected as they source many of their product lines on long-term fixed-price contracts. And, of course, as shoppers look for value there is a move towards own-brand labels or a trade down on their weekly shop. In October, own-label sales rose by 10.3%. There is a slightly increased flow of discounter-backed assets now coming to the market and these will be highly sought-after when available.From a real estate perspective, supermarkets remain underpinned by fundamental consumer demand and, although not immune, will be less susceptible to price volatility than other asset classes. And while the debt markets remain unsettled, there is still a large amount of investor equity looking for a home.Grocery-backed assets have a track record of being resilient even in times of economic stress. This was demonstrated most recently during the pandemic, and also in 2008 in the immediate aftermath of the global financial crisis.In this context, we would expect that the supermarket sector – which offers long income on large urban sites and serve a non-discretionary use – will once again be the preferred route for many buyers during the coming year when the economic outlook is likely to remain challenging

[williamcooper104] 16/11/2022 12:52

£190m cash coming in next year helps PHP has a lot of capex to fund at now much higher rates and need to mostly rely upon open market rent reviews as opposed to RPI linked uplifts

[bscuit] 16/11/2022 12:37

Dividend cover for next few years looks weak compared to PHP, which has similar yield.

[cwa1] 16/11/2022 07:41

Reassuringly, the dividend is in the account this morning...

[williamcooper104] 16/11/2022 07:36

14.2 on RPI

[williamcooper104] 16/11/2022 07:32

CPI 11.1 Food and drink 16.4 v from memory the c13-14 assumed previously