REG - Supermarket Inc REIT - Acquisition of Additional Stake in JV for £196m

Supermarket Income REITAnnouncement

12/01/2023 07:00

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RNS Number : 4631M  Supermarket Income REIT PLC  12 January 2023

 

12 January 2023

 

SUPERMARKET INCOME REIT PLC

(the "Company") 

LEI: 2138007FOINJKAM7L537

 

Acquisition of Additional Stake in Joint Venture for £196 million

  

Supermarket Income REIT plc (LSE: SUPR), the real estate investment trust
providing secure, inflation-protected, long income from grocery property in
the UK, announces an update in relation to its joint venture (the "JV") with
British Airways Pension Trustees Limited ("BAPTL").

 

The Company has acquired BAPTL's 25.5% beneficial interest in the Sainsbury's
Reversion Portfolio (the "SRP Portfolio") for £196 million (excluding
acquisition costs), resulting in the Company's beneficial interest in the SRP
Portfolio increasing to 51.0%. The remaining 49.0% beneficial interest in the
SRP Portfolio is held by Sainsbury's plc ("Sainsbury's"). The ownership
structure of the SRP Portfolio will contractually unwind in March 2023 and
July 2023 as detailed below.

 

Background

 

The SRP Portfolio comprises the freeholds to 26 Sainsbury's supermarkets of
which 21 properties (the "Option Stores") will be acquired by Sainsbury's for
£1,040 million in two tranches in March 2023 and July 2023.

 

Beneficial ownership of the five remaining stores is held between the Company
and Sainsbury's in the same proportions as the beneficial interests.
Sainsbury's has entered into new 15-year leases on four of these stores with
five yearly open market rent reviews and a tenant break option at year 10. It
is expected that the one store that has not been regeared will be sold at
vacant possession value.

 

As a result of Sainsbury's purchasing the Option Stores, the Company will
receive a minimum of £380 million in cash from Sainsbury's in two tranches,
£264 million in March 2023 and £116 million in July 2023.

 

The Company's investment in the SRP Portfolio has generated high returns for
shareholders. To date, it has produced an estimated money-on-money multiple of
1.9x and an IRR of 26%, representing 8 pence per share in NTA growth.

 

The acquisition is expected to be attractive versus SUPR's target property
returns and accretive to the Company's expected return from the SRP Portfolio.

 

The acquisition of BAPTL's beneficial interest also gives the Company a 51.0%
stake in this strategically important transaction with Sainsbury's.

 

Financing

 

The acquisition has been funded entirely by a new debt facility (the
"Facility") provided by JPMorgan Chase Bank. The Facility has no recourse to
any of SUPR's assets other than its interest in the SRP Portfolio. The
Facility has a margin of 1.5% over SONIA and an arrangement fee of 2.0%.

 

The Facility will be repaid in full following receipt of the first payment
from Sainsbury's in March 2023.

 

Based on the Company's last published property portfolio valuation as at 30
June 2022, the pro forma loan-to-value ratio ("LTV") following the acquisition
is 39% (from 36% pre-transaction). The LTV is expected to decline to 31%
following the repayment of the Facility in March 2023 and to 26% in July 2023
following receipt of the second tranche of proceeds from Sainsbury's.((1))

 

 

Further information:

 

Background to the acquisition

 

In May 2020, the Company formed a 50:50 joint venture with BAPTL to acquire
from British Land Plc a 25.5% stake in the SRP Portfolio, one of the UK's
largest portfolios of supermarket properties, for £102 million, excluding
acquisition costs. Subsequently, in February 2021 the JV acquired a further
25.5% stake in this portfolio from Aviva for £115 million, excluding
acquisition costs.

 

The SRP Portfolio was created in 2000 through two sale and leaseback
transactions which were funded by bonds issued under two securitisations,
Highbury Finance B.V. ("Highbury") and Dragon Finance B.V. ("Dragon").
Highbury and Dragon comprise 16 and 10 Sainsbury's supermarkets respectively.

 

The Occupational Leases and Sainsbury's Purchase Option

 

Sainsbury's occupies the stores under the current occupational leases (the
"Occupational Leases") and pays 100% of the rents. The Occupational Leases
expire coterminously with the maturity of the bonds in March 2023 (in relation
to Highbury) and July 2023 (in relation to Dragon).

 

The income from the Occupational Leases services the interest and principal
repayments of the bonds. The bonds amortise out of the rental income, with a
remaining debt balance of £315 million on expiry.

 

In September 2021 and in January 2022, Sainsbury's exercised options to
acquire 21 stores within the SRP Portfolio. The purchase price on the 21
Option Stores is contractually agreed at £1,040 million.  Sainsbury's will
acquire the stores in March 2023 (£678 million) and July 2023 (£362 million)
on expiry of the Occupational Leases.

 

Joint Venture Investment Adviser fees

 

Under the terms of the Joint Venture Limited Partnership Agreement ("LPA") put
in place May 2020, an affiliate of the Investment Adviser to the Company,
Atrato Halliwell Limited ("Atrato Halliwell"), has a carried interest promote
entitlement (the "Promote") over the investment returns from the SRP
Portfolio. The amount of Atrato Halliwell's Promote entitlement is unchanged
as a result of this transaction.

 

Further details regarding the estimated value of the Promote relating to the
Company's investment in the SRP Portfolio are included in note 14 to the 30
June 2022 Annual Report and Accounts.

 

Having significantly exceeded the IRR hurdle rate under the original terms of
the LPA, £7.5 million will be paid to Atrato Halliwell representing BAPTL's
share of the Promote.

 

There are no additional management advisory fees payable by the Company in
respect of this investment.

 

 

 

 

 FOR FURTHER INFORMATION                                                                           
 Atrato Capital Limited                                                                           +44 (0)20 3790 8087 
                                  
 Steven Noble / Rob Abraham / Chris McMahon                                                       ir@atratocapital.com (mailto:ir@atratocapital.com)   
  

 Stifel Nicolaus Europe Limited                                                                    +44 (0)20 7710 7600
 Mark Young / Matt Blawat / Rajpal Padam                                                           
                                                                                                   
 FTI Consulting                                                                                   +44 (0)20 3727 1000 

  
 Dido Laurimore / Eve Kirmatzis / Andrew Davis                                                    SupermarketIncomeREIT@fticonsulting.com
                                                                                                  (mailto:SupermarketIncomeREIT@fticonsulting.com)   

NOTES TO EDITORS: 

Supermarket Income REIT plc (LSE: SUPR) is a real estate investment trust
dedicated to investing in grocery properties which are an essential part of
the UK's feed the nation infrastructure. The Company focuses on grocery stores
which are omnichannel, fulfilling online and in-person sales. All of the
Company's supermarkets()) are let to leading UK supermarket operators,
diversified by both tenant and geography.

 

The Company provides investors with attractive, long-dated, secure,
inflation-linked, growing income with the potential for capital appreciation
over the longer term and targets a 7% to 10% p.a. total shareholder
return((2)). The Company has increased its dividend every year since IPO.

 

The Company is listed on the premium segment of the Official List of the UK
Financial Conduct Authority and its Ordinary Shares are traded on the Main
Market of the London Stock Exchange, having listed initially on the
Specialist Fund Segment of the Main Market on 21 July 2017.

Atrato Capital Limited is the Company's Investment Adviser. 

 

Further information is available on the Company's
website www.supermarketincomereit.com (http://www.supermarketincomereit.com/)
 

 

1. Loan to value calculation is based on pro forma balance sheet included in
the September 2022 results presentation, adjusted for Direct Portfolio
acquisitions, borrowings, Investment Adviser fees and dividends paid to date.
The loan to value ratio includes the new financing for this acquisition and
the value of the SRP Portfolio is based on SUPR's minimum distributions from
Option Stores.

2. There is no certainty that these illustrative projections will be
achieved

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