Supermarket Income Reit Share Discussion Threads

[williamcooper104] 22/3/2023 14:06

There's no question that there's a risk to the divi when the 2.5 percent facility expires; it's not like some REITs were it's an almost certainty that the divi will be cut (eg VNA/GYA who've already cut and say EBOX who probably will cut ), but high enough swaps and margins and clearly even with rental growth the divi will be cut - but even then it's likely to be more of a trim than a massive cut And I wouldn't hold breath waiting for an increase But then you get down to the property fundamentals - and 6-6.5 yields with 10-11 unlevered prospective IRRs on prime supermarkets is cheap

[williamcooper104] 22/3/2023 14:00

One other point The 165bps was secured from a bank For unsecured corporate debt rated BBB+ (and an easy/robust credit story) there's every chance they'll be able to borrow at 100-130bps I'm personally bullish on credit spreads coming in as the weight of capital seeking low risk 5-7 returns is much greater than the available lending opportunities as investors/sponsors are frequently buying with all equity as there's little point borrowing unless you get a material uplift in potential return

[chucko1] 22/3/2023 13:47

Nickrl, it is worth noting, concerning updates, that the investors presentation due in early Feb was cancelled at the last minute. Consequently, any update will be eagerly read.

[nickrl] 22/3/2023 13:25

@chucko thanks for taking the trouble to set out how the debt could work. Im interested at this level but with the amount of shares they've issued over the last year they've built up a big cost of paying the current dividend which im not convinced will be covered by cash earnings which is potentially fine as they inbuilt earnings increase and wont end off any worse than last 12mths until CPI/RPI sub 5%. Mind you with all the moving parts here im waiting for next weeks HY results to see the state of the nation and here what they have to say about the future.

[chucko1] 22/3/2023 12:59

SUPR have long leases. They can, should they wish, look at longer-dated borrowings and consequent fixes on this debt. Currently, they have decided to focus on the 3-4 year area, and I have little reason to doubt their ability to make the correct call in this respect.

But this is what it could look like, ceteris paribus should they use market levels as follows:

10 year swaps - 3.5% (including today's rise)
10 year inflation swaps - 3.8%
LTV - 30%
Current average borrowing rate - 2.9%

In 10 years, let's assume they raise rents by that average 3.8% and therefore around 45% by the end of the period. So that approximates to an average increase of 20% over the period.

Let's further assume they borrow for 10 years as their current borrowing mature over the next 3 years. And also that they will borrow at the current 165bps over the swap rate. So new borrowings will be at 5.2% in 3 years (ignoring the negative expected movement of forward swaps), meaning that the average borrowing rate over the next 10 years is 3/10 x (2.9% + 5.2%)/2 + 7/10 x 5.2% = 4.85%

So they are paying, on average, (4.85% - 2.9%)/2.9% = 67% more in interest. On an LTV of 30%, this amounts to just about 20% if allocated over the entire value of the assets. Funnily enough, exactly the same as the rise in income.

Of course, the increase in interest payments is likely to come before the rise in rental increases, although this is not certain - and so the near term may be a matter of precise timings of debt rolling and lease renewals/increases.

Absent of that specific detail, there is no nibbling away of capital owing to overly demanding dividends. Currently, the dividend yield is 7% and itself somewhat inflation-linked. So the value of SUPR is really related to the perceived value of this 7% annuity and that is much a function of risk appetite.

It is worth recalling that the guys running the show here are not, first and foremost, property experts. Rather, they are expert on the financial side, although they have certainly brought in notable property expertise. I am sure they have excellent reasons for managing the debt as they do, and will have thought through the sorts of figures (and rejected the idea) I have briefly described above.

The capital markets numbers (rates and inflation) are hedgable. For that matter, so are the credit spreads on the UK supermarkets, but they do not do this. Nevertheless, when I have asked on conference calls whether they engage in this or not, I got the overwhelming impression that they did not (they ought to listen to me(!!), but I am sure they have far more complex modelling going on that I, owing to the specifics of the intentions of the leaseholders and various development plans).

But it's food for thought, and indicates to me that I should own more at this level than I currently do. So I probably will, despite the headwinds the entire sector is facing (especially in terms of risk appetite).

[williamcooper104] 21/3/2023 08:56

The cost will either be the stated 4.65 - or a little lower as the difference between the swap broken and the cost of the new one might be amortised over the life of the new facility - the difference won't be very material - so can take the stated cost as either exact or close enough

[chucko1] 21/3/2023 08:23

It makes sense to state both figures (£2.8mn and £3.3mn) as it allows you to establish that the loan refinanced was fixed at a very low rate and with some certain period left to run.

Owing to the inverted YC shape, they may have considered that the premium of £3.3mn was attractive relative to the fall in rates of the longer maturity refinancing. Makes sense, but as I have always argued, those ex-GS guys will be all over such things.

[chucko1] 21/3/2023 08:18

#1386 - Yes, exactly so. The current rates are among the lowest we have seen for a while, apart from a very brief period in February. They likely executed this at around 11.00am yesterday - rates are now 8bps higher than then.

Given the shape of the YC, they very much seem to target the 3-4 year area for their liabilities.

[frazboy] 21/3/2023 08:15

Alan - because I'm trying to work out the real cost of the loan rather than the impact on the balance sheet. Market seems happy at the moment

[alan@bj] 21/3/2023 08:12

Cost of hedging was £2.8m but £3.3m rebated on termination of previous hedging arrangement, so why take it into consideration at all?

[frazboy] 21/3/2023 07:51

Am I right in thinking that the effective cost of the new loan is more like 5.35% when you take into account the cost of the ‘hedging instrument’?

[rik shaw] 15/3/2023 15:32

2022 Annual report noted 'Contracted inflation rent reviews in the year, including a number of five-yearly rent reviews, resulted in average passing rent increases in the Portfolio of 3.7%... A further £11.5 million of rental contributions were also recognised from new acquisitions during the year.'

[williamcooper104] 15/3/2023 15:09

SUPR outperforming even HOME today :)

[williamcooper104] 15/3/2023 15:09

I think it's closer to 4 But there are some fixed uplifts from memory as well Supermarkets always freaked out about market rent reviews but I think there might be a few

[spectoacc] 15/3/2023 12:37

@nickrl - I wasn't sure if that was 3.7% overall (ie on the rent roll as a whole, adjusted or acqns etc) or 3.7% just on the leases where there was any change in the rent, on average?

[nickrl] 15/3/2023 10:49

@chucko yes debt is good but it cost them 35m up front to fix it though anyhow im torn with this one as they've issued a lot of shares in H2 and thats ramped up the divi cost considerably. It wasn't covered at FY at cash level and even though rent has gone up further from acquisitions it wont be sufficient. They will also be carrying a valuation deficit this half as well which they've never experienced before so wont be able to hide behind EPS. That said with high inflation they made 3.7% on RPI linked rental increases last year and that's repeatable this year (many of their Tesco leases have 5% cap and overall although some are as low as 3.5%)so projecting forward and with reduced debt it has the opportunity to come good. They will be able to reduce debt a fair bit with the income from the JS sale so that will help close the gap as well.

Problem is this edifice is built for acquisitions and they need to be getting them for >5.5%+ NIY as whilst i reckon inflation has a long tail dropping back below 5% is highly probable and then they will lose the annual uplifts.

Anyhow im sitting on sidelines till the HY results in a couple of weeks although this one has a good following so will no doubt get a boost from the financial press at these levels.

[chucko1] 14/3/2023 12:39

And for three years, they have fixed the debt side at less than the inflation cap. Debt is now sub 30% (LTV) so this is a mega long term hold at about the 7% level.

[nickrl] 14/3/2023 12:21

@specto totally agree on inflation but c+2% tail for extra year isn't going to be disastrous and given you could have got 7% yield here yesterday as long as SUPR can cover a divi at that level whether it goes up by less than inflation doesn't bother me im interested in sustainability for the long run.

[spectoacc] 14/3/2023 09:18

Flipside - change in IR expectations means inflation is going to stay higher for much longer, and SUPR is going to be restricted in rent rises by caps.

But still seems too cheap down here IMO (but I would say that).

[frazboy] 14/3/2023 08:56

GLG winding in their short. Change in IR expectations may cause them to do so more rapidly than they may have planned. Decent technical and fundamental bounce possible here.

[rik shaw] 14/3/2023 07:48

UPDATE ON SALE OF SAINSBURY'S REVERSION PORTFOLIO INTEREST:


'The net proceeds are expected to be used to reduce the Company's existing debt facilities, further strengthening the Company's balance sheet. Based on the Company's last published portfolio valuation as at 31 December 2022, the Company's LTV is expected to decline to c.34.4% in March 2023 and c.29.7% in July 2023 following receipt of the first two tranches of the consideration'

[skyship] 13/3/2023 13:21

I estimate the NAV here as 92p. Anyone else have a view?

[skyship] 10/3/2023 10:41

Wc - Thnx for all of the above

[starpukka] 10/3/2023 10:23

Bought in @ 83.6 .