REG - Supermarket Inc REIT - AUDITED RESULTS FOR THE YEAR ENDED 30 JUNE 2023
20/09/2023 07:00
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RNS Number : 9915M Supermarket Income REIT PLC 20 September 2023
SUPERMARKET INCOME REIT PLC
(the "Group" or the "Company")
AUDITED RESULTS FOR THE YEAR ENDED 30 JUNE 2023
GROCERY SECTOR STRENGTH UNDERPINS DEMAND FOR MISSION CRITICAL SUPERMARKETS
Supermarket Income REIT plc (LSE: SUPR), the UK supermarket real estate
investment trust providing secure, inflation-linked, long income from grocery
property in the UK, reports its audited consolidated results for the Group for
the year ended 30 June 2023 (the "Year").
FINANCIAL HIGHLIGHTS
12 months to 12 months to
30-June-23 30-June-22 Change in Year
Annualised passing rent(1) £100.6m £77.6m +30%
Operating profit(2) £79.8m £58.2m +37%
Adjusted earnings(1,3,4) £72.4m £57.4m +26%
Changes in fair value of investment properties (£256.1m) £21.8m n/a
Dividend per share declared 6.00 pence 5.94 pence +1%
Adjusted EPS(1,3) 5.8 pence 5.9 pence -2%
Dividend cover(1,5) 0.97x(5) 1.08x n/a
30-June-23 30-June-22 Change in Year
IFRS net assets £1,218m £1,432m -15%
EPRA NTA(1) £1,156m £1,427m -19%
EPRA NTA per share(1) 93 pence 115 pence -19%
EPRA LTV(1) 35.2% 22.2% n/a
Direct Portfolio net initial yield(1) 5.6% 4.6% n/a
Resilient financial performance with strong income growth
· 30% increase in annualised passing rent to £100.6 million
o 100% occupancy
o 100% of rent collected
o 4.1% average rental uplift
· 26% increase in adjusted earnings to £72.4 million
· FY 2023 dividend of 6 pence per share, target dividend of 6.06 pence
per share for FY 2024
Grocery sector strength and resilience driving elevated property investment
volumes
· UK grocery market grew 11% during the period(6)
· 30% increase in UK grocery market since IPO to £242 billion(7)
· Supermarket store revenues growing much faster than rents, improving
affordability and rental values
· UK supermarket property investment volumes exceeded £1.7 billion
during the year(8)
Active portfolio management - accretive asset sales and capital recycling
· Sale of interest in 21 supermarket properties held in the SRP at a NIY
of 4.3%(9) and a total consideration of £430.9 million(10), delivering a:
o 30% IRR
o 1.9x money-on-money multiple
· Purchase of eleven supermarket properties at a NIY of 5.5%(11) for a
total consideration of £399.0 million
High-quality portfolio of mission critical supermarkets(12)
· Future-proofed portfolio of omnichannel stores
· Capturing elevated online grocery demand, which is up +80% since
2019(13)
· 14 years weighted average unexpired lease term ("WAULT")
· Strong performing tenant covenants; 77% of income from Sainsbury's and
Tesco
· 78% of rental income is inflation-linked, subject to caps of 4% per
annum on average
Lower supermarket property valuations reflect higher interest rates with
encouraging indications that valuations are stabilising
· Direct Portfolio independently valued at £1.69 billion (30 June 2022:
£1.56 billion), reflecting a NIY of 5.6% as at 30 June 2023 (30 June 2022:
4.6%)
· Direct Portfolio value stable versus last reported valuation (31
December 2022: £1.63 billion reflecting a NIY of 5.5%)
Strong balance sheet with 100% of drawn debt hedged
· Fitch Ratings Limited ("Fitch") investment grade credit rating of BBB+
reaffirmed in February 2023
· Total debt further reduced post balance sheet with current LTV of 34%
· Refinancing of facilities during the year and post balance sheet
extending weighted average debt maturity by 12 months to four years(14) (30
June 2022: four years)
· Unsecured debt increased to 61% of debt commitments (30 June 2022:
Nil)
· 100% of drawn debt hedged and interest rate hedging extended by 12
months:
o Weighted average finance cost fixed at 3.1% (30 June 2022: 2.6%)
o Existing in-the-money hedges restructured to extend hedge term at zero net
upfront cost
Continued progress on sustainability and governance programme
· Supported the responsible investment commitments made by our
Investment Adviser as a signatory of the Net Zero Asset Managers Initiative
and United Nations Principles for Responsible Investment
· Published our first voluntary, fully TCFD compliant annual report,
consistent with all 11 of the TCFD recommendations and recommended disclosures
· Committed to submit a target to the Science Based Target Initiative by
Q4 2023
Nick Hewson, Chair of Supermarket Income REIT plc, commented:
"The UK grocery sector has again demonstrated resilience despite the
challenging macroeconomic environment we have experienced during the year. We
remain focused on our investment strategy of acquiring and managing a
high-quality portfolio of omnichannel supermarkets. These give us exposure to
the fastest growing segment of the UK grocery market which itself is
experiencing strong growth.
During the year, Sainsbury's purchased our interest in the Sainsbury's
Reversion Portfolio joint venture for £430.9 million which we redeployed into
higher-yielding supermarkets that met our strict investment criteria alongside
reducing our debt, materially strengthening our balance sheet.
This purchase by one of our own tenants of 21 of its own stores highlights the
attractiveness of UK supermarket property, which is further illustrated by the
fact that the year has seen in excess of £1.7 billion of investment volume in
our property sub-sector, driven by the positive long-term outlook for UK
grocery. This activity has contributed to stabilising property valuations in
the UK supermarket property sub-sector.
As we look forward, the quality of our unique omnichannel supermarket
portfolio and the increasing affordability of grocery rents, together with our
robust balance sheet means we are well positioned to continue delivering
long-term value for our shareholders."
For further information:
FOR FURTHER INFORMATION
Atrato Capital Limited +44 (0)20 3790 8087
Steven Noble / Rob Abraham / Chris McMahon ir@atratocapital.com
Stifel Nicolaus Europe Limited +44 (0)20 7710 7600
Mark Young / Matt Blawat / Rajpal Padam
Goldman Sachs International +44 (0)20 7774 1000
Jimmy Bastock / Tom Hartley
FTI Consulting +44 (0)20 3727 1000
Dido Laurimore / Eve Kirmatzis / Andrew Davis SupermarketIncomeREIT@fticonsulting.com
The Company will be holding an in-person presentation for analysts at 08.30am
today at FTI Consulting's offices, 200 Aldersgate, Aldersgate Street, London,
EC1A 4HD. To register to attend in-person, please contact FTI Consulting:
SupermarketIncomeREIT@fticonsulting.com. There will also be a webcast
available. To join the presentation via the webcast, please register using the
following link: https://brrmedia.news/SUPR_FY23
(https://brrmedia.news/SUPR_FY23)
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((1)).
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/)
LEI: 2138007FOINJKAM7L537
1. There is no certainty that these illustrative projections will be
achieved
Stifel Nicolaus Europe Limited, which is authorised and regulated in the
United Kingdom by the Financial Conduct Authority, is acting exclusively for
Supermarket Income REIT plc and no one else in connection with this
announcement and will not be responsible to anyone other than the Company for
providing the protections afforded to clients of Stifel Nicolaus Europe
Limited nor for providing advice in connection with the matters referred to in
this announcement.
Goldman Sachs International, which is authorised by the Prudential Regulation
Authority and regulated by the Financial Conduct Authority and the Prudential
Regulation Authority in the United Kingdom, is acting exclusively for
Supermarket Income REIT plc and no one else in connection with this
announcement and will not be responsible to anyone other than the Company for
providing the protections afforded to clients of Goldman Sachs International
nor for providing advice in connection with the matters referred to in this
announcement.
CHAIR'S STATEMENT
Dear Shareholder,
I am pleased to report a resilient operational performance for the Company, in
what has been a challenging year for the broader economy and the real estate
investment market.
Despite the economic volatility, the UK grocery market has grown by 11% during
the year and 30% since our IPO to a £242 billion market today. This
highlights the strength and resilience of grocery spending through the peaks
and troughs of the economic cycle.
Throughout the year, we have focused on our investment strategy of building
and managing a unique high-quality portfolio of omnichannel supermarkets,
which gives us exposure to the fastest growing segment of the expanding UK
grocery market. Growth in the grocery market is enhancing the strength of our
tenants and the affordability of our rents, providing positive tailwinds for
future rental growth across the portfolio.
The robust performance of the supermarket operators is in stark contrast to
the valuation declines experienced by the broader property investment market.
The scale and pace of interest rate hikes since September 2022 has triggered a
rapid decline in property values, with the MSCI UK All Property Capital Values
Index declining by over 19% for the year to 30 June 2023. Supermarket property
has been less volatile, but not immune, with a 14% like-for-like decline in
our portfolio value resulting in a net initial yield of 5.6% as at 30 June
2023 (30 June 2022: 4.6%, 31 December 2022: 5.5%).
The property market experienced an initial rapid repricing to December 2022.
We have since observed a stabilisation of pricing in recent transactions and
our 30 June 2023 valuations are essentially flat to our last reported
valuation as at 31 December 2022. It is also noteworthy that we have seen
significant investment volumes in UK supermarket property which have exceeded
£1.7 billion(15). This total includes £483 million of leasehold store
buybacks by operators; a unique feature of the grocery real estate market.
This elevated interest in grocery property highlights the positive long-term
outlook for the sector. We are cautiously optimistic on the outlook for
supermarket property valuations, though we recognise the general correlation
of these values to Bank of England policy and interest rate movements.
The Company owns and manages a unique and high-quality portfolio of mission
critical omnichannel supermarkets. Our sector specialism and information
advantage allow us to identify and deliver value through actively managing the
portfolio. During the year, our tenant Sainsbury's purchased our interest in
the Sainsbury's Reversion Portfolio ("SRP") Joint Venture ("JV"), buying back
21 stores at a 4.3% Net Initial Yield ("NIY"), for which the Company received
proceeds of £430.9 million. The proceeds from these disposals, received
during the year and post balance sheet, were recycled into higher-yielding
acquisitions(16) that met our strict investment criteria, and utilised to pay
down debt. As a result, drawn debt has reduced from £672.2 million in June
2023, to £584.8 million today. During the year we acquired nine stores and a
further two shortly after year end for a combined total consideration of
£399.0 million at an average NIY of 5.5%.
We continue to focus on maintaining balance sheet strength and at year end our
European Public Real Estate ("EPRA") Loan to Value ("LTV") was 35%, which has
further reduced post year end, following the further receipt of monies from
the sale of the SRP interest. Our debt is provided by a well diversified group
of relationship banks. Post the year end, we have expanded our banking group
and extended the term of our debt facilities to in excess of four years(17).
We also took the prudent decision to fix the cost of 100% of our drawn debt.
All our borrowings are either fixed rate or hedged to a fixed rate via
interest rate derivatives with an average cost of debt of 3.1%.
During the year, we strengthened our governance credentials with the
appointment of Sapna Shah to the Board. Sapna brings extensive corporate
finance and governance experience having advised listed REITs and investment
companies as a senior investment banker. Sapna has agreed to chair the new
Management Engagement Committee which is tasked with the job of ensuring that
we receive best value from our key service providers.
Sustainability continues to be a key focus of both the Board and the
Investment Adviser. Having established an ESG committee, chaired by Frances
Davies, we have this year voluntarily published a Task Force on
Climate-related Financial Disclosures ("TCFD") compliant Annual Report and
Accounts, significantly enhancing the Company's sustainability reporting and
environmental commitments. We are pleased to present this report in full in
this year's Annual Report and Accounts and the accompanying Sustainability
Report. In addition, the Company has also made a commitment to submit a
greenhouse gas emissions reduction target to the Science Based Target
Initiative ("SBTi") by Q4 2023. The Company supports the Investment Adviser's
signatory status of the Net Zero Asset Managers Initiative ("NZAM") and the
United Nations Principles for Responsible Investment ("UNPRI"). At the asset
level we are working with our tenants on initiatives such as the installation
of solar photovoltaic ("PV") panels and electric vehicle charging to further
enhance the Company's sustainability performance.
Outlook
While economic conditions look set to remain challenging in the near term, our
unique high-quality portfolio of omnichannel supermarkets, let on long-term,
predominantly inflation-linked leases, with strong tenant covenants, in the
non-discretionary spend sector of grocery, continues to offer a compelling
investment case.
The stabilisation of valuations in the short term and strong sector dynamics
in the medium to long-term mean that the Board is confident of the growth
prospects for the Company. However, we remain cautious given the uncertain
economic backdrop and accordingly, the Company is targeting a conservative
dividend increase to 6.06 pence per share for the next financial year.
Nick Hewson
Chair
19 September 2023
A conversation with Justin King about the future of the UK grocery sector
Justin King is a senior adviser to Atrato Partners. Justin is recognised as
one of the UK's most successful grocery sector leaders, having served as CEO
of Sainsbury's for over a decade and previously held senior roles at Marks
& Spencer, Asda, PepsiCo and Mars.
Justin is currently a Non-Executive Director of Marks & Spencer and Chair
of Allwyn Entertainment, leading its transition to operating the National
Lottery licence. Justin also advises a series of high-profile consumer-focused
companies including Itsu Grocery, where he chairs the grocery business, and is
the Chair of Dexters Real Estate. Justin is an advocate for responsible
business and has been instrumental in launching several charitable concerns
including the charity Made by Sport, which champions the power of sport to
change young lives. Justin brings an unrivalled wealth of grocery sector
experience and a deep understanding of grocery property strategy.
Q: How have the supermarket operators been reacting to unprecedented increases
in the cost of living faced by many consumers, especially given the impact
from recent grocery price inflation?
Clearly the high rate of food price inflation is having a major impact on
consumers' budgets, although it has started to decline from its peak of 19%
with many analysts expecting it to fall to around 8-10% by the end of 2023.
While the rate of increase is likely to slow, I expect actual food prices to
continue to rise at least until mid-2024.
Several factors are contributing to this high food price inflation, mainly
significant rises in the cost of food commodities, increased energy costs and
the depreciation of Sterling, all of which have raised the domestic price of
inputs into the food supply chain and for the most part are outside the
control of operators. Perhaps the most persistent pressure will be labour
costs, which makes up in excess of 20% of the cost of the average basket of
groceries if you take a full supply chain view.
We are seeing clear evidence that the operators have not 'passed through' to
consumers all the cost increases that they have incurred as evidenced from
falling operating margins from 3.2% to around 1.8% on average(18). It is worth
noting that a grocer's power to implement price rises is less than many people
think, as the sector's intense competitiveness drives low margins and high
operational efficiencies.
However, I believe that the most impactful contribution operators are making
is the change to their product lines and promotional strategies on the shelves
to help their customers switch from expensive calories to less expensive
calories. Think of it as giving the customer the ability to achieve a cut in
their pence per calorie consumed or 'dial out' inflation. In previous
recessions we have seen the effectiveness of supporting the customer through
value alternatives. That's why the traditional supermarkets carry an extensive
range of products to ensure their mix can cater for the changing needs of the
customers' shopping basket.
Q: You mention the reduction in profit margins for operators. Does that give
you any concerns about the sector and by extension supermarket property
values?
If you take the longer-term view, historical net profit margins of the
incumbent operators range between 3% and 5% and that will typically wax and
wane depending on how much pressure there is from competition and costs. Over
time, changes in productivity, operational efficiencies and pricing eventually
restores margins to a more normal long-run level of around 4%.
The supermarkets have clearly taken a view that squeezing net profit margins
today is the right thing to do to help their customers in this current
environment. In time that will of course correct, though not necessarily
result in an increased cost to the customer. Part of that correction will
naturally come from running the business as efficiently as possible and there
will also be some challenging cost of goods conversations with suppliers who
have perhaps over-inflated. So, in time, I believe we will see profit margins
coming back to a more normal level.
I don't believe this current cycle of lower net margins will impact
supermarket property values. Supermarket rents represent a very small
proportion of total costs - this is in significant contrast to other sectors.
Short-term changes in profitability will not affect an operator's ability to
pay rent, especially on their best sites, demonstrating the resilience of
these large scale, well positioned, supermarkets. In fact, with the top line
inflating and rent increases lagging, rent as a percentage of sales (which is
the key metric for operators) is actually reducing.
Of course, supermarket property has not been immune to the outward yield shift
experienced across all property investment markets. However, these declines in
values are reflecting the outward shift in property yields applied by valuers
because of higher interest rates and the overall macroeconomic environment.
Q: Why have transaction volumes in supermarket real estate remained high
relative to other real estate sectors, especially against the backdrop of
higher interest rates?
It is worth noting that when you examine performance trends over the last 15
years, the supermarket property investment market has been less volatile than
the broader UK property market. In fact, the sector has been a stand-out
positive performer in contrast to others, illustrating the long-term strength
and stability of this somewhat unique asset class.
Investors looking for property assets that offer consistent income are
increasingly targeting the supermarket property sector. Research from Atrato
on property investment volumes clearly shows that this trend continues with
transaction liquidity in supermarket property investments remaining high
relative to the declines seen in other property markets.
In the next phase of the cycle, I think we will start to see market rents
inflating above passing rents on most existing stores given the high levels of
inflation driving store turnovers above rental cap levels. In addition, rising
construction costs on developing new stores are making supermarket store
leases look increasingly good value. This is one of the drivers of the store
buyback activity that we are seeing from Tesco and Sainsbury's.
Given the current high yield on offer as a function of higher rates, it is not
surprising to see increased investment interest in the asset class. Having
said that, not all supermarket property is equal and specialists like the
Atrato team are critical to ensure the right asset selection for the
long-term.
Q: Digitalisation of business models and the opportunities from artificial
intelligence are generating significant headlines. Do you believe supermarket
operators have embraced this and how do you see its application to the UK
grocery market?
The digitalisation of the economy has generated turbulent change across many
industries. We saw this first in the media sector, followed by retail and then
moving rapidly into all other sectors. Digitalisation is an ever-changing
force that many businesses understandably struggle to keep up with.
However, the idea that incumbent grocers have not embraced digitalisation is a
false one. In fact, the reality is very different. The incumbent grocers
transitioned from an analogue to digital business model around the early
2000's following the introduction of Clubcard by Tesco and Nectar by
Sainsbury's. The data from these loyalty card systems meant that we could see
what people were buying and, for the first time, who was buying it. This was
coupled with an ability to process that data in close to real time. It is
staggering to think that the Clubcard today is held by over 20 million
households in the UK.
These loyalty programmes provide powerful insights for operators looking to
tailor the range, mix and price of products to meet the needs of the consumer,
as well as an appreciation of how to serve customers better in the future.
Additionally, operators are able to understand the differences between when
customers shop, what they buy and through which channel. The insights gained
from these systems were key factors behind UK grocers becoming early adopters
of omnichannel strategies. Operators recognised the value of seamless
integration between online and offline fulfilment, empowering them to become
truly blind to channel. Of course, today, this is fashionably characterised as
big data technology, however it's been operating for over 20 years in UK
grocery.
I'm a firm believer that the potential of this information will grow,
especially when overlaid with the processing power of artificial intelligence.
However, grocery will always remain a people-facing sector and in the new
omnichannel environment, digital technology will continue to provide a
valuable complementary tool in serving the customer better through a network
of physical stores.
Q: Valuations within pure play online and ultra-convenience platforms such as
Ocado and Getir have declined over the last 24 months. What do you think is
behind that and do you think the market is less convinced on the potential of
online grocery post the pandemic highs?
In the last five years we have seen a dramatic change in the online grocery
landscape, including a step change in demand. Online accounted for 8% market
share in 2018, a figure which subsequently peaked at 15% in 2021 at the height
of the pandemic, and which is around 12% today. Online grocery is set to
remain the fastest growth channel proportionately, but still behind the
volumes seen in the physical supermarket and convenience channels.
I think pure play online operators had been considered by some as a route to
overcome the barriers to entry into the wider £242 billion UK grocery market
and an opportunity to capture much of the online growth in the space. However,
technology in the form of very large, centralised warehouses with automated
picking operations have failed to provide any substantive cost or flexibility
advantage. In fact, a better understanding of the true economics points to the
global convergence of an omnichannel model with stores acting as last mile
fulfilment centres. Automated picking technology is increasingly being
deployed inside the physical store via micro-fulfilment solutions as a more
productive alternative to manual store pick.
What the pandemic period has shown is the importance, flexibility and
resilience of the omnichannel store pick model. This has allowed the
incumbents to take a leading market share in online grocery, with the large
multi-channel grocers now controlling over 80%(19) of the online market in the
UK. This is in contrast to the market belief that new technology players would
capture that online market. I have always believed that we should "think
customer, not channel". In a post-pandemic era, the customer requires seamless
integration between online and offline channels offered by omnichannel
supermarkets.
In addition, rapid grocery delivery platforms such as Deliveroo and Just-Eat
have increasingly been partnering with supermarkets including Sainsbury's,
Waitrose and Aldi as a more effective way of addressing the ultra-convenience
grocery market than the dark store model of Getir and others.
Of course, centralised, online-only distribution units or warehouses will
still have a role to play in providing a solution to store capacity
constraints in metropolitan areas or as a solution to operators with limited
store networks. However, I think this will be a smaller role than the market
would have previously perceived.
Q: Environmental sustainability is in the spotlight, given the impact of
climate change seen across multiple countries this year. What role do you
think supermarkets as retailers have to play in this area?
Supermarkets have generally been ahead of other sectors in understanding the
full supply chain and management of farm-to-fork strategies. A key role of the
supermarket is to represent the consumer in the supply chain and given the
heightened consumer concern around environmental sustainability when shopping
for groceries, supermarket operators are becoming a driving force for a more
sustainable supply chain.
According to a recent report from Cushman & Wakefield, 26% of global
green-house gas emissions are attributable to the food supply chain with
around 83% derived from production(20). The supermarket operators are
therefore naturally placed to centralise and coordinate this drive towards the
decarbonisation of the wider food supply chain.
When we launched the 20 by 20 Sustainability Plan at Sainsbury's in 2011, we
set ambitious goals for a more sustainable footprint, which today has
developed even further to reduce scope 1 & 2 emissions to Net Zero by 2035
and reduce Scope 3 emissions to Net Zero by 2050.
In fact, Sainsbury's has now reduced its absolute greenhouse gas ("GHG")
emissions within its operations to 461,692 tCO(2)e, a reduction of 38%
year-on-year and 51% per cent from its 2019 baseline, keeping it on course to
achieve its 2035 Net Zero target(21). It's also encouraging to see the grocery
industry taking a lead in implementing substantive governance frameworks
around reporting progress against these vitally important sustainability
objectives too.
Many problems however can also be opportunities in disguise. A route to being
transparent on environmental sustainability provides a platform for the
grocers to build another conversation with the customer, in marketing terms,
around assessing the environmental impact of their basket of groceries in a
way which can differentiate brand and add value to consumers.
All together, these are important building blocks that are compounding at an
increasing rate. Over time, I believe we will look back and see grocers as an
industry leader in improving how to measure, report and reduce the carbon
footprint of the food that we consume.
KEY PERFORMANCE INDICATORS
Our objective is to provide secure, inflation-linked, long income from grocery
property in the UK. Set out below are the key performance indicators we use to
track our progress.
KPI Definition Performance(22 )
1. Total Shareholder Return Total shareholder return ("TSR") is one of the Group's principal measures of (34%) for the year to 30 June 2023 (31 December 2022: (11.7%), 30 June 2022:
performance. 7%)
TSR is measured by reference to the growth in the Company's share price over a
period, plus dividends declared for that period.
2. WAULT WAULT measures the average unexpired lease term of the Direct Portfolio, 14 years WAULT as at 30 June 2023 (31 December 2022: 14 years, 30 June 2022:
weighted by the Direct Portfolio valuations. 15 years)
3. EPRA NTA per share The value of our assets (based on an independent valuation) less the book 93 pence per share as at 30 June 2023 (31 December 2022: 92p, 30 June 2022:
value of our liabilities, attributable to shareholders and calculated in 115p)
accordance with EPRA guidelines. EPRA provides three recommended measures of
NAV, of which the Group deem EPRA NTA as the most meaningful measure. See Note
26 for more information.
4. Net Loan to Value The proportion of our investment property portfolio gross asset value that is 37% as at 30 June 2023 (31 December 2022: 40%, 30 June 2022: 19%)
funded by borrowings calculated as balance sheet borrowings less cash balances
divided by total investment properties valuation.
5. Adjusted EPS* EPRA earnings adjusted for company specific items to reflect the underlying 5.8 pence per share for the year ended 30 June 2023 (31 December 2022: 2.9p,
profitability of the business. 30 June 2022: 5.9p)
*New measure reported during the period, with prior year comparative stated in
line with new methodology.
Adjusted earnings(23) is a performance measure used by the Board to assess the
Group's financial performance and dividend payments. The metric adjusts EPRA
earnings by deducting one-off items such as debt restructuring costs and the
Joint Venture acquisition loan arrangement fee which are non-recurring in
nature and adding back finance income on derivatives held at fair value
through profit and loss. Adjusted Earnings is considered a better reflection
of the measure over which the Board assesses the Group's trading performance
and dividend cover.
Finance income received from derivatives held at fair value through profit and
loss are added back to EPRA earnings as this reflects the cash received from
the derivatives in the period and therefore gives a better reflection of the
Group's net finance costs.
Debt restructuring costs relate to the acceleration of unamortised arrangement
fees following the partial transition of the Group's debt structure from
secured to unsecured.
The Joint Venture acquisition loan arrangement fee relates to the upfront
amount payable to J.P. Morgan in respect of the short-term facility taken out
in January 2023 to fund the Group's purchase of BAPTL's 50% interest in the
Joint Venture. This was specific debt taken out to finance the transaction to
acquire and then dispose of the joint venture, whilst protecting the Group
from any recourse on unwind of the Joint Venture's financial asset. This
adjustment reflects the arrangement fee only, as the Group largely had other
committed undrawn facilities that it could have utilised.
Adjusted EPS reflects the adjusted earnings defined above attributable to each
shareholder.
The Group uses alternative performance measures, as disclosed above and
including the EPRA Best Practice Recommendations ("BPR") to supplement its
IFRS measures as the Board considers that these measures give users of the
Annual Report and financial information the best understanding of the
underlying performance of the Group's property portfolio.
The EPRA measures are widely recognised and used by public real estate
companies and investors and seek to improve transparency, comparability and
relevance of published results in the sector.
The key EPRA performance measures used by the Group are disclosed on the
following page.
Reconciliations between EPRA measures and the IFRS financial statements can be
found in Notes 10 and 27 to the financial information.
EPRA PERFORMANCE INDICATORS
The table below shows additional performance measures, calculated in
accordance with the Best Practices Recommendations of the European Public
Real Estate Association (EPRA). We provide these measures to aid comparison
with other European real estate businesses.
For a full reconciliation of all EPRA performance indicators, please see the
Notes to EPRA measures within the supplementary section of the annual report.
Measure Definition Performance(24)
1. EPRA EPS A measure of EPS designed by EPRA to present underlying earnings from core 4.6 pence per share for the year ended 30 June 2023 (31 December 2022: 2.6p,
operating activities. 30 June 2022: 5.9p)
2. EPRA Net Reinstatement Value (NRV) per share An EPRA NAV per share metric which assumes that entities never sell assets and 103 pence per share as at 30 June 2023 (31 December 2022: 102p, June 2022:
aims to represent the value required to rebuild the entity. 124p)
3. EPRA Net Tangible Assets (NTA) per share An EPRA NAV per share metric which assumes entities buy and sell assets, 93 pence per share as at 30 June 2023 (31 December 2022: 92p, 30 June 2022:
thereby crystallising certain levels of unavoidable deferred tax. 115p)
4. EPRA Net Disposal Value (NDV) per share An EPRA NAV per share metric which represents the shareholders' value under a 98 pence per share as at 30 June 2023 (31 December 2022: 97p, 30 June 2022:
disposal scenario, where deferred tax, financial instruments and certain other 116p)
adjustments are calculated to the full extent of their liability, net of any
resulting tax.
5. EPRA Net Initial Yield (NIY) & EPRA "Topped-Up" Net Initial Annualised rental income based on the cash rents passing at the balance sheet 5.5% as at 30 June 2023 (31 December 2022: 5.3%, 30 June 2022: 4.6%)
Yield date, less non-recoverable property operating expenses, divided by the market
value of the property, increased with (estimated) purchasers' costs. The
"topped-up" yield is the same as the standard measure as we do not have
material adjustments for any rent-free periods or other lease incentives.
6. EPRA Vacancy Rate Estimated Market Rental Value (ERV) of vacant space divided by ERV of the 0.4% as at 30 June 2023 (31 December 2022: 0.5%, 30 June 2022: 0.2%)
whole portfolio.
7. EPRA Cost Ratio (Including direct vacancy costs) Administrative & operating costs (including costs of direct vacancy) 15.5% for the year ended 30 June 2023 (31 December 2022: 16.7%, 30 June 2022:
divided by gross rental income. 16.5%)
8. EPRA Cost Ratio (Excluding direct vacancy costs) Administrative & operating costs (excluding costs of direct vacancy) 15.2% for the year ended 30 June 2023 (31 December 2022: 16.5%, 30 June 2022:
divided by gross rental income. 16.4%)
9. EPRA LTV Net debt divided by total property portfolio and other eligible assets. 35.2% as at 30 June 2023 (31 December 2022: 40.2%, 30 June 2022: 22.2%)
10. EPRA Like-for-like rental growth* Changes in net rental income for those properties held for the duration of Rental increase of 2.7% for the year ended 30 June 2023
both the current and comparative reporting period.
11. EPRA Capital Expenditure* Amounts spent for the purchase of investment properties (including any £377.3 million for the year ended 30 June 2023 (31 December 2022: £310.2
capitalised transaction costs). There has been no other capital expenditure million, 30 June 2022: £388.7 million)
incurred in relation to the investment property portfolio.
*New measure reported during the year, with prior year comparative stated in
line with new methodology
INVESTMENT ADVISER'S INTERVIEW
Atrato is the Company's Investment Adviser. Ben Green (Principal) and Robert
Abraham (Managing Director, Fund Management) discuss SUPR's performance and
the long-term outlook for the business.
FUND REPORT
Q: In a year of significant macroeconomic headwinds, how has SUPR fared?
Commercial property is a cyclical asset class that typically underperforms
during the interest rate hike phase of an economic cycle. What has been
different during the current cycle was the pace and magnitude of interest rate
rises which triggered a rapid repricing of the cost of capital and therefore
the yields demanded by commercial property investors. This property yield
repricing was reflected by valuers quickly and arguably more efficiently than
in previous cycles.
During an economic downtown, the key concern for most property companies is
the ability of their tenants to pay their rent. This is not a concern for SUPR
given the strength of the underlying tenants and is evidenced by the Company's
100% rent collection. The supermarket assets that SUPR owns are mission
critical to its tenants and that essentiality ensures 100% occupancy.
On a relative basis, markets generally expect supermarket property to be less
volatile than broader property markets given the defensive nature of the
underlying grocery sector. This has again played out during this cycle with
SUPR's high-quality asset valuation down 13.7% during the year compared to
broader UK commercial property valuations which are down 19%(25).
SUPR has understandably been impacted by the challenging equity markets for
real estate companies, which whilst disappointing, does now present an
interesting value proposition for investors. UK grocery sales have experienced
strong growth over the past 12 months, and our key tenants Tesco and
Sainsbury's have reported strong free cashflow growth in the period,
underlining their positive performance the current economic climate. The
disconnect between the recent fortunes of grocery operators compared with real
estate companies is highlighted by the share price performance of Tesco and
Sainsbury's during the period compared with that of Real Estate Investment
Trusts and owners of grocery property such as SUPR.
The Company's share price performance vs Tesco & Sainsbury's (indexed)
Our key tenants, Tesco and Sainsbury's, have reported sales growth of around
10% in their latest figures(26). This growth has been generated on a
like-for-like basis given there has been no net new floor space for large
multi-channel operators. This sales growth is running ahead of contractual
rental increases, meaning that rents are becoming even more affordable for
operators.
Q: What has been the key commercial focus of the Investment Adviser during the
year?
Our focus has been on taking a more active approach to asset management within
the portfolio; rotating capital, strengthening the balance sheet and
delivering progress on our sustainability goals.
A key milestone was the sale of the joint venture interest in the SRP our
tenant Sainsbury's purchased 21 supermarkets held in the joint venture at a
net initial yield of 4.3%, with the Company receiving proceeds of £430.9
million. This followed on from the NTA accretive acquisition of the interest
of our original joint venture partner British Airways Pension Trustees Limited
("BAPTL") in January for £188.8 million (excluding acquisition costs), which
was fully funded by a debt facility provided by J.P. Morgan.
We utilised these proceeds to pay down debt reducing EPRA LTV from 40.2% to
35.2%. The Company's LTV was further reduced post balance sheet and currently
stands at 34.0%. The Company has also been opportunistically deploying into
new acquisitions at attractive net initial yields. In total we have deployed
£399 million during the year including two properties since the year end at
an accretive net initial yield of 5.5%(27). This included four omnichannel
stores from the Sainsbury's Reversion Portfolio. This recycling of capital
into higher-yielding assets that met our strict investment criteria has helped
offset some of the increase financing costs incurred as a result of higher
interest rates.
Q: How has SUPR's financing strategy changed in response to these
macroeconomic challenges?
We and the Board considered it prudent to repay debt to reduce the Company's
LTV post balance sheet to 34.0%, utilising the second tranche of the SRP
proceeds and taking a number of actions to manage debt maturities and hedging
post year end. We also extended the term of our debt by 12 months, maintaining
a weighted average debt maturity of over 4 years(28), whilst also broadened
our banking group. Further, we conducted a 'blend and extend' hedge
restructure, utilising the significant profit on the pre-existing hedge
arrangements to extend the term of the hedges by 12 months(28). As a result of
this treasury management exercise, SUPR's cost of debt is now fixed at an
average rate of 3.1%.
A testament to the strength of the investment proposition is SUPR's continued
access to liquidity, despite concerns in other commercial real estate sectors.
During the year the Company refinanced its term loan with BLB. This was
achieved during the period following the collapse of Silicon Valley Bank and
Credit Suisse, calling into question the availability for financing for
commercial real estate. We also added Sumitomo Mitsui Banking Corporation
("SMBC") as a new relationship bank, highlighting lender appetite for
supermarkets. Fitch also reaffirmed SUPR's BBB+ investment grade credit rating
in February 2023.
The debt maturity profile below, which includes uncommitted extension options,
highlights the spread of maturities and diverse relationship lenders which
support the Company.
The Company's debt maturity profile
SUPR has covenant headroom across its debt facilities along with over £100
million of undrawn debt capacity. The Company is well positioned and
importantly, retains additional capital capacity to be acquisitive if
compelling opportunistic investment propositions arise(29).
Q: What has been the impact on SUPR's portfolio/valuation?
The total net initial yield moved out on the portfolio by 100bps from 4.6% to
5.6% during the year; a fall in valuation of 14% on a like-for-like basis.
This compares to the MSCI UK All Property Capital Values Index which fell 19%
in the same period, reflecting the high quality of the Company's assets and
defensive nature of supermarkets. The portfolio's inflation-linked rent
reviews also provide an element of natural hedge to the higher inflation and
interest rates environment, partially offsetting the portfolio yield shift.
The decline in property values occurred quickly during autumn 2022 and the
impact on SUPR's EPRA NTA was reflected in the Company's interim results for
the period to 31 December 2022. During the second half of SUPR's financial
year valuations stabilised and therefore the reported June 2023 valuations are
essentially flat compared to those reported as at December 2022. This is
supported by good transactional evidence from a particularly liquid investment
market relative to the UK property market as a whole. The elevated liquidity
observed in the UK supermarket property market is a result of investors being
attracted to the attractive risk/return profile of grocery assets following
the repricing that has taken place.
Recent transactional evidence would imply that peak cycle yields in
supermarket property may well be behind us, and further, that yields on
high-quality omnichannel stores are actually starting to tighten. However, we
remain acutely aware that a long-term yield tightening trend can only occur
once the market is convinced that UK base rates have reached the top of this
cycle.
INVESTMENT MARKET
Q: What impact has the high inflation environment had on the supermarket
investment market?
Higher interest rates as a policy response to inflation have driven a rapid
repricing of commercial real estate assets and supermarkets have not been
immune. However, this now means that supermarkets are in our view one of the
most attractive asset classes in commercial real estate.
Investment Property Databank ("IPD") net initial yields 2006-2023 (YTD)(30)
Total market volume during the year was £1.7 billion. As shown below, Tesco
and Sainsbury's store buybacks represent a substantial share of this volume,
alongside which we see purchasers active in two broad strategies.
Supermarket investment volumes FY 2019 - 2023(31)
Firstly, value oriented, levered purchasers are targeting higher yielding
opportunities at c. 7% NIY. These value players are opportunistically
targeting Asda and Morrisons stores, buying at historically wide yields due to
weaker levered covenants and in some cases weak store trading. Secondly there
are buyers of high-quality supermarkets at yields of c. 5%, which is more
closely aligned with the type of assets in the SUPR portfolio. These assets
are typically let to the strong covenants of Sainsbury's and Tesco on long
leases. Buyers are looking to the attractive returns that can be achieved,
with current valuations representing a significant value opportunity in our
view. This is particularly the case as higher inflation arguably supports
higher market rental growth.
Significant institutional demand for grocery real estate is particularly
evidenced by the success of the recently announced Asda sale and leaseback,
which is reported to have achieved a £650 million transaction price despite
challenging market conditions.
Q: Should we expect to see more sale and leaseback ("SLB") activity by the
operators?
Not necessarily, as it depends on the operators' funding requirements and
strategic objectives.
The more highly levered operators, Asda and Morrisons, have demonstrated
appetite for SLBs. This is likely to continue as an attractive source of
finance compared to the prospective cost of leveraged finance in the current
environment, given peak leverage for Asda of c. 7x and for Morrisons c.
9x(32). Asda is expected to use the £650 million proceeds of its SLB at a
6.4% NIY to fund part of the cost of acquiring EG Group. The cost of the SLB
compared favourably to the debt leverage for the acquisition provided by
Apollo which was priced at c. 11%.
It is worth noting that these operators have historically preferred to own
their stores, with only c. 15% of their stores being leasehold. That gives
both significant capacity for SLB activity while maintaining a proportion of
freehold stores in line with Tesco and Sainsbury's.
On the other hand, we have seen Tesco and Sainsbury's utilising free cashflow
generation for store buybacks, alongside bond repurchases to de-lever their
balance sheets. They have balanced this with returning cash to shareholders
through share buybacks. Since SUPR's IPO in 2017, Tesco has increased the
proportion of its store ownership from 52% to 58%(33). The most notable recent
example of operator store buybacks was the sale to Sainsbury's of SUPR's
interest in the Sainsbury's Reversion Portfolio, with the portfolio of 21
stores acquired by Sainsbury's valued at over £1 billion.
Operator buybacks and SLBs on long leases highlight the mission critical
nature of supermarket real estate. Operators seek to own or secure decades of
occupation of their best performing stores, which are also the stores targeted
by SUPR.
PORTFOLIO
Q: What makes supermarket property 'mission critical' to the operators?
Stores are vital to grocers' operations. Whether sales are achieved through
traditional in-store shopping or online, the store network and associated
supply chain infrastructure is critical to generating revenue.
The flexibility of omnichannel stores, such as those in SUPR's portfolio, has
been clearly demonstrated in the last few years, as operators are able to
reposition resources to fulfil orders through consumers' chosen channel. Pure
play operators, whether solely online or physical, are not able to flex
between channels in the same way.
While online market share is significantly higher than pre pandemic levels, as
expected, it has come off the peak of 15%, settling at c. 12%. Whilst we
expect growth to revert to the modest long-term trend from here, the ability
of the grocers to rapidly respond to changing consumer habits is a key barrier
to entry to the market.
Tesco's latest results highlight how valuable large format stores are for
operators. These stores are Tesco's largest growth channel with sales up 9.9%.
An element of this growth is a result of cost-conscious consumers seeking to
achieve better value through the lower price point and greater promotional
activity. However, another attraction is also the broader product range at
large format stores, providing greater opportunity to shop across product
ranges including premium and value options.
Q: Given the majority of SUPR's assets are occupied under full repairing and
insuring ("FRI") leases, what action is being taken to demonstrate the
Company's commitment to sustainability?
At the asset level, at sites which are not fully demised to the tenants under
FRI leases, we are looking to enhance sustainability wherever possible. That
starts with electric vehicle charging points, which we are targeting for eight
sites so far, while at the time of writing construction has begun at two
sites.
We have also worked with Tesco and Atrato Onsite Energy (LSE: ROOF) to support
the installation of a rooftop solar array at our Tesco store in Thetford. This
solar array energised in September 2023. We are looking to roll out solar
installations across as many stores as possible in the portfolio.
Our grocery tenants have formal Net Zero commitments, resulting in very good
engagement with SUPR on sustainability initiatives as these are beneficial for
both landlord and tenant alike. We are now receiving energy consumption data
from c. 85% of tenants and are looking to increase this further. We are
delighted to have produced our first annual report which includes voluntary
reporting in-line with the recommendations of the TCFD.
A benefit of the supermarket operator sustainability commitments coupled with
long-dated, FRI leases is that tenants therefore invest in modernising and
decarbonising stores within our portfolio at their own expense.
In all new leases we do our utmost to negotiate 'green' lease provisions,
which permit the Company to access greater sustainability data from tenants,
further aligning the interests of SUPR and its tenants.
OUTLOOK
Q: What will be the key areas of focus for the fund in FY 2024?
Strategically we have positioned the Company to have a very robust balance
sheet thus protecting it from any further macroeconomic surprises, whilst
maintaining sufficient capital capacity to enable the Company to invest
opportunistically into compelling investment opportunities that may arise as a
result of the challenging broader market backdrop.
In the near term we will continue to actively manage the portfolio, seeking to
generate value for shareholders.
We have progressed plans to develop complementary retail units at a number of
our larger sites(34) (#_ftn34) . We are negotiating terms to develop discount
food stores of c. 20,000 sq.ft. alongside our strong performing existing
supermarkets. Such development can drive additional footfall, making a more
appealing grocery destination to consumers and increasing total grocery spend
at the site.
Whilst we invest in stores with a long-term hold objective, the Company
regularly receives approaches on individual assets from potential buyers. As
demonstrated by the sale of the SRP during the year, there may be an
opportunity to selectively dispose of assets. Proceeds can then be reinvested
opportunistically in the current market environment, which can be value
accretive whilst fully utilising our sector specialism.
THE COMPANY'S PORTFOLIO
The Company has built a handpicked portfolio of strong trading, 'mission
critical' omnichannel supermarkets backed by the UK's leading grocery
operators.
A key pillar of the Company's investment policy is to acquire omnichannel
supermarkets that form a key part of the UK grocery network. These stores
offer both an online provision and in-store shopping, helping to capture a
greater share of the UK grocery market. Currently 93% of our supermarket
assets are omnichannel, by value.
The leases on our stores benefit from long, unexpired lease terms with
predominately upwards only, index linked rent reviews, helping to provide
long-term income with contractual rental growth. The portfolio benefits from
affordable rents. Our Direct Portfolio average rent to turnover ("RTO") is
3.8%(35) compared to a sector benchmark RTO of 4.0%. We have high security of
income with 100% rent collection during the year.
The Company's assets are predominantly let to the leading UK grocery tenants
with Tesco and Sainsbury's accounting for 77% of the Company's rent roll.
As part of the Company's investment strategy to acquire high-quality, strong
trading supermarkets, it is sometimes necessary to acquire complementary
non-grocery units that are co-located with the store. These units often form a
retail destination helping to drive further footfall into the supermarket.
Non-grocery assets represent 6.2% of the Direct Portfolio by value.
The Company disposed of its joint venture interest in the SRP for a combined
total of £430.9(36) million. The consideration was based on a blended net
initial yield of 4.3% for the underlying stores. There is further information
on the SRP investment on page 29.
During the year, the Company selectively strengthened its Direct Portfolio
with the addition of nine supermarkets for a combined total of £362.6
million(37) at eleven different locations, including a further two after the
year end.
· July 2022: A Tesco superstore and M&S Foodhall in Chineham,
Basingstoke, including non-grocery units for £71.9 million(37). The Tesco
superstore had a 12-year unexpired lease term and is subject to 5-yearly,
upwards only open market rent reviews.
· August 2022: A Sainsbury's supermarket and M&S Foodhall in Glasgow
with non-grocery units for £34.5 million(37). The unexpired lease terms of
the two stores were 10 and 15 years respectively and both are subject to
5-yearly upwards only, open market rent reviews.
· August 2022: A Tesco supermarket in Newton-le-Willows, Merseyside, for
£16.6 million(37). The store had a 12-year unexpired lease term and is
subject to annual, upwards only RPI-linked rent reviews.
· August 2022: A Tesco in Bishops Cleeve, Cheltenham, for £25.4
million(37). The store had a 12-year unexpired lease term and is subject to
annual, upwards only RPI-linked rent reviews.
· eptember 2022: A Tesco supermarket in Llanelli, South Wales, for £66.8
million(37). The store had a 12-year unexpired lease term and is subject to
annual, upwards only RPI-linked rent reviews.
· September 2022: A Tesco supermarket, Iceland Food Warehouse and
complementary non-grocery units in Bradley Stoke, Bristol, for £84.0
million(37). The Tesco store had a 14-year unexpired lease term and is subject
to annual, upwards only RPI-linked rent reviews.
· April 2023: A Tesco in Worcester, for £38.3 million(37). The store
had a 12-year unexpired lease term and is subject to annual, upwards only
RPI-linked rent reviews.
· May 2023: A Sainsbury's in Kettering, for £12.0 million(37). The
store has a 10-year unexpired lease term and is subject to 5-yearly upwards
only, open market rent reviews.
· May 2023: A Sainsbury's in Denton, for £13.2 million(37). The store
has a 10-year unexpired lease term and is subject to 5-yearly upwards only,
open market rent reviews.
Post balance sheet, following the receipt of the second tranche of SRP
disposal proceeds the Company announced that it had acquired a further two
supermarkets from Sainsbury's that were previously held within the SRP for a
purchase price of £36.4 million(38).
· July 2023: A Sainsbury's in Gloucester, for £17.4 million(38). The
store has a 10-year unexpired lease term and is subject to 5-yearly upwards
only, open market rent reviews.
· July 2023: A Sainsbury's in Derby, for £19.0 million(38). The store
has a 10-year unexpired lease term and is subject to 5-yearly upwards only,
open market rent reviews.
Acquisitions during the year were financed using proceeds received from the
unwind of the SRP, existing headroom within unsecured debt facilities and the
proceeds from the equity raise in April 2022. For more information on
financing arrangements refer to note 20 of the financial information.
A table summarising the properties in the Direct Portfolio can be found in the
Portfolio section on the Group's website: www.supermarketincomereit.com
(http://www.supermarketincomereit.com)
Tenant exposure:
Tenant Exposure by Exposure by
rent roll Valuation
Tesco 48.2% 48.9%
Sainsbury's 28.7% 30.4%
Morrisons 6.2% 5.6%
Waitrose 4.7% 5.2%
Asda 2.1% 2.0%
Aldi 0.8% 0.8%
M&S 0.8% 0.9%
Non-food 8.5% 6.2%
Total 100.0% 100.0%
*Including post balance sheet events
The strength of the Direct Portfolio is underpinned by long-term, secure
income with a weighted average unexpired lease term of 13 years(39). In
addition, our portfolio is heavily weighted towards upwards only
inflation-linked rent reviews which provide protection in the current
inflationary environment and help to reduce the impact of rising debt costs.
The Direct Portfolio's weighting towards upwards only, inflation-linked rent
reviews is 78% with 54% reviewing annually (including post balance sheet
acquisitions).
Indexation Income mix by
rent review type
RPI 71.2%
CPI 6.7%
Fixed 2.1%
OMV 20.0%
Total 100.0%
*Including post balance sheet events
WAULT
Supermarket WAULT
breakdown
0-5 years 0.2%
5-10 years 19.3%
10-15 years 45.8%
15-20 years 29.6%
20+ years 5.2%
Total 100.0%
*Including post balance sheet events
The environmental efficiency of our stores continues to be a key priority
through asset management initiatives, selective acquisitions and is supported
by the ongoing investment by grocery tenants into respective store estates. A
breakdown of supermarket EPC ratings can be seen below:
Supermarket EPC breakdown
EPC rating % of supermarket
Portfolio
A 4.2%
B 46.2%
C 33.7%
D 15.8%
Total 100.0%
*Including post balance sheet events
Portfolio case studies:
1) Tesco, Bishop's Cleeve
The standalone Tesco Supermarket was acquired in August 2022 in an off-market
transaction. The 44k sq.ft. store was constructed in 1998 and is situated on a
4-acre site within the town centre. At acquisition, the store had an unexpired
lease term of 12 years, subject to annual RPI linked reviews (0% floor and 5%
cap).
Post-acquisition, Tesco introduced a two bay Click & Collect operation
within the car park, which demonstrates the ease of omnichannel expansion
within strong, pre-existing grocery locations.
2) Tesco, Llanelli
This Tesco supermarket was acquired by the Company in September 2022 in an
off-market transaction. The large format 120k sq.ft. store was built in the
late 1980s and was extended in 2006. Its strategic location provides
omnichannel capacity for Tesco in South Wales, operating ten delivery vans and
a dedicated three bay Click & Collect facility in the car park. There is
only one alternative Tesco store operating home delivery within a 25 minute
drive time radius.
At acquisition, the store had an unexpired lease term of 12 years, subject to
annual RPI linked reviews (0% floor and 5% cap).
The store adds to the Group's weighting to inflation-linked leases within the
portfolio and emphasises the Company's strategy of acquiring strong trading,
omnichannel hubs in geographically diverse locations.
3) Tesco, Worcester
In April 2023, the Company acquired a strong performing 65k sq.ft. Tesco
supermarket in Worcester in an off-market transaction. Tesco has a long
trading history at the store, having operated at the site since the early
1990s which was subsequently expanded in 2008. The store is an online hub for
Tesco, operating nine delivery vans and a Click & Collect facility helping
to supply the predominantly residential local catchment. There is only one
alternative Tesco store operating home delivery within a 25 minute drive time
radius.
At acquisition, the store had an unexpired lease term of 12 years, subject to
annual RPI linked rent reviews (0% floor and 4% cap).
The store further increases rental indexation within the portfolio and
increases the Company's exposure to the UK's strongest grocery tenants.
Sainsbury's Reversion Portfolio
Between May 2020 and January 2023, the Company built a c. 51% stake in the
Sainsbury's Reversion Portfolio firstly through a joint venture with BAPTL and
then through buying out BAPTL's stake. The SRP consisted of the freehold
interest in 26 geographically diverse high-quality Sainsbury's supermarkets,
with a London and southeast location bias.
Sainsbury's occupied the stores in the SRP under leases due to expire during
2023. The investment case for acquiring the stakes in the SRP was based on the
Company's conviction that Sainsbury's would remain in occupation of a large
majority of the stores.
This proved to be correct with Sainsbury's exercising options to acquire 21
stores within the SRP (the Option Stores) for £1,040 million from the SRP and
entering into new 15-year leases on four of the five remaining stores within
the SRP (the Non-Option Stores).
In January 2023, the Company acquired BAPTL's interest in the SRP for £188.8
million (excluding acquisition costs). This acquisition was wholly funded by a
receivables loan from J.P. Morgan secured against the Company's share of
proceeds from the sale of the 21 Option Stores.
In March 2023, the Company sold its 51.0% beneficial interest in the SRP to
Sainsbury's for a gross consideration of £430.9 million (excluding costs)
payable in tranches.
The first tranche of £279.3 million was received on 17 March 2023 and the
second of £116.9 million on 10 July 2023.
The Company received the third tranche when it acquired the four Non-Option
Stores for a total consideration of £61.6 million. The remaining store will
be sold at vacant possession value and the Company will receive 51.0% of the
net proceeds, which are expected to be approximately £1.5 million.
The net proceeds from the sale of the Company's interest in the SRP have been
used to reduce the Company's existing debt facilities, providing the Company
with balance sheet flexibility and the ability to take advantage of
opportunistic value add transactions.
Portfolio valuation
Cushman & Wakefield valued the Direct Portfolio as at 30 June 2023, in
accordance with the RICS Valuation - Global Standards which incorporate the
International Valuation Standards and the RICS UK Valuation Standards edition
current at the valuation date.
The properties were valued individually without any premium/discount applying
to the Direct Portfolio as a whole. The Direct Portfolio market value was
£1,685.7 million, an increase of £124.1 million reflecting a valuation
decline of £253.2 million offset by new acquisitions of £377.3 million. This
valuation reflects a net initial yield of 5.6% and a like-for-like valuation
decline of 13.7% since 30 June 2022. The benchmark MSCI All Property Capital
Index during the same period was down 19%.
The decline in valuation reflects the outward shift in property yields applied
by valuers across the real estate sector as a result of higher interest rates
and the macroeconomic environment. This was largely recognised in the first
half of the year, with a like-for-like valuation decline of 13.4% reported in
the Company's valuation as at 31 December 2022. Valuations remained broadly
flat in the second half of the year.
The valuation decline in the year has however been partially mitigated by our
contractual inflation-linked rental uplifts. The average annualised increase
in rent from rent reviews performed during the year was 4.1%. 80% of the
Company's leases benefit from contractual rental uplifts, with 78% linked to
inflation and 2% with fixed uplifts.
THE UK GROCERY MARKET
Atrato Capital Limited is the Investment Adviser to the Company. Steven Noble
(Chief Investment Officer of Atrato Capital) discusses the UK grocery market
and the outlook for real estate investment in the sector.
Q: How has the grocery sector performed over the last few years given the
turbulent market macroeconomic backdrop?
The grocery market has demonstrated its defensive characteristics yet again
over the last few years. Total UK grocery market sales are up 11% in the year,
with the total UK grocery market now expected to generate over £240 billion
in annual sales in 2023(40).
In fact, since IPO, the grocery market will have increased by over £50
billion from £185 billion in 2017 to an estimated £242 billion in 2023
representing a compound growth rate of 5% which exceeds both CPIH inflation
and GDP growth over the same period.
IGD UK Grocery Market Value 2018 - 2028 (forecast)
Grocery is non-discretionary expenditure which accounts for 14%(41) of
household spending. The change in consumer behaviour towards a greater
proportion of time spent working from home and the increased market
penetration of online grocery has resulted in a long-term structural shift in
grocery demand. This has been achieved against a very turbulent five-year
period for the wider UK economy which includes Covid lockdowns, supply
disruptions, the Ukraine war, inflation and a sharp increase in interest
rates.
This long-term growth has been driving record flows of investment into the
sector from a broad range of institutional investors, including the £14
billion of net investment from the sale of Asda in 2021 and Morrisons in 2022.
This year there has also been £1.7 billion(42) of capital investment into the
supermarket property sector from investors looking for assets that offer
consistent returns, underpinned by solid corporate covenants and low rent to
turnover ratios.
The outlook for the sector remains positive, with structural long-term growth
drivers, which in turn support property rental growth over the medium to
long-term.
Q: What operators have been capturing this growth and who are the largest
operators in the UK grocery market?
Six major supermarket operators fulfil over 83% of UK grocery demand with the
majority fulfilled via a combined network of over 4,500 stores across the UK.
Kantar Worldpanel June 2023 - UK grocery market share by operator
Tesco, Sainsbury's, Asda and Morrisons are the larger multi-channel grocers
who boast a combined market share of approximately 65%. Each of these
businesses has multi-billion-pound revenues, an established consumer brand and
core supermarket locations across the UK. These operators play an integral
role in the UK market, successfully operating a strategy of price and
assortment management through a multi-channel brand focused strategy. Their
combined market share is largely unchanged since 2019, meeting demand of the
enlarged market through their existing network of stores and deep-rooted "farm
to fork" supply chains which provide a significant barrier to entry to the UK
market.
We are seeing some short-term pressure on margins, as the grocers seek to
shield consumers from price rises. However, these well-established
multi-channel operators have been generating consistent profitability and free
cashflows with net profit margins that typically averaged around 4% over the
long-term.
The second largest group of operators is the lower-price grocery operators
("Discounters") such as Aldi and Lidl. They have grown through ambitious new
store opening programmes which have captured a combined market share of 18%.
However recent significant increases in construction costs are expected to
result in a decline in the number of new stores in the coming years. The
Discounters' lower cost, low-margin business model requires simplicity and
standardisation of range which is attractive to price sensitive customers.
This discount market remains highly competitive and the sector typically
operates a lower net profit margins of between 1% to 2%. These fine margins
mean that the Discounters are inflating prices quicker than other operators,
having peaked at 26% compared to 15% for Tesco and Sainsbury's(43). Therefore,
we see an element of market share gain coming simply through higher prices.
Q: What changes have you seen in the various grocery formats over the last 5
years?
As illustrated below, over the last five years the supermarket channel has
remained the dominant sales channel in the UK grocery market, while online
grocery has been the fastest growing, despite paring back from pandemic peaks
over the last year.
Institute of Grocery Distribution ("IGD") UK Grocery Channel forecasts
In the last 5 years we have seen a dramatic change in the online grocery
channel. In 2018 online accounted for 8% of market share. The channel's market
share rapidly increased, peaking at 15% in 2021 at the height of the pandemic
and it has since fallen to around 12% today. Online grocery is, however, set
to remain one of the fastest growth channels in the grocery sector according
to IGD's forecasts.
The larger multi-channel operators have responded rapidly and effectively to
capture this growth, increasing home delivery and Click & Collect capacity
from a network of stores acting as last mile fulfilment centres. This agility
has pioneered the new omnichannel store model that combines the largest
channel with the fastest growing.
Larger supermarkets with in-store pick capacity have been well positioned to
fulfil this growth with over 80%(44) of online grocery sales estimated to now
be fulfilled from these omnichannel stores. At the extreme, our research has
shown that the turnover of some individual omnichannel grocery stores is now
50% online and 50% physical shopping, and a 25%:75% split is not uncommon.
The UK's large multi-channel grocers pioneered the development of the
omnichannel business model towards which we are seeing a global convergence.
The seamless integration between online and offline is a very significant
development within the grocery industry empowering the operator to be truly
blind to channel. Future grocery strategy can therefore be focussed purely on
the customer and be agnostic to where the sale takes place - in-store, or
online via delivery or Click & Collect.
Our investment strategy is aligned with this future model of grocery. A key
pillar of the Company's strategy is investing in omnichannel supermarkets to
capitalise on the long-term structural trend towards growing omnichannel
operations. We believe that our high-quality portfolio of omnichannel
supermarket properties will deliver sustainable income and capital growth over
the long-term.
Q: What is a typical supermarket lease structure?
Supermarket lease agreements are often long-dated and inflation-linked.
Original lease tenures range from 15 to 30 years without break options. Rent
reviews often link the growth in rents to an inflation index such as RPI, RPIX
or CPI (with typically 4% caps and 0% floors), or, alternatively, may have
fixed annual growth rates or open market rent reviews.
An open market review means that the rent is adjusted (usually upwards only)
to reflect the rent the landlord could achieve on a letting in the open
market. Such rent reviews take place either annually or every five years, with
the rent review delivering an increase in the rent at the growth rate,
compounded over the period.
Landlords usually benefit from "full repairing and insuring leases". These are
lease agreements whereby the tenant is obligated to pay all taxes, building
insurance, other outgoings and repair and maintenance costs of the property,
in addition to the rent and service charge.
Operators often have the option to acquire the leased property at the lease
maturity date at market value. Furthermore, to ensure that the operator does
not transfer its lease obligation to other parties, assignment of the lease by
the tenant is restricted.
Q: How has supply and demand for supermarket property performed?
The supermarket sector is a highly attractive asset class within real estate
investment. The financial performance by the UK's major grocery operators
against a backdrop of growing UK grocery market and inflation has attracted
increasing numbers of domestic and international institutional investors to
invest in UK supermarket property.
Supermarkets have been less volatile than the broader UK property market when
you examine investment performance trends over the last 15 years, illustrating
the long-term strength and stability of this asset class, and underlining its
ability to provide highly attractive and resilient income.
The significant level of grocery market growth and current high levels of
inflation have driven the increase in store turnovers materially above rental
caps making supermarket store leases look increasingly good value.
In addition, the combination of yields offered by supermarket properties and
the rental review structures from which our market benefits mean they offer
highly attractive long-term returns. As such, it is not surprising to see over
£1.7 billion level of investment in this asset class over the 12-month period
ending 30 June 2023.
There has been some supply of new grocery investment property opportunities
due to the growth in the store network of the Discounters and the recent sale
and leaseback activity from Asda and Morrisons, however, the buyback of
supermarket property by Tesco and Sainsbury's over the last five years has
resulted in a net overall contraction of leasehold supply. We believe this
will be favourable to long-term yield compression in our sector.
The defensive characteristics displayed by supermarket property coupled with
ongoing demand for long-term secure income is expected to continue to generate
strong investor demand in this asset class for the foreseeable future.
FINANCIAL OVERVIEW
Atrato Capital Limited, the Investment Adviser to the Group, is pleased to
report the financial results of the Group for the 12 months ended 30 June
2023.
IFRS net rental income for the year to 30 June 2023 increased by 32% to £95.2
million, up from £72.1 million in the prior year. Contracted inflation rent
reviews in the year resulted in average passing rent increases in the
Portfolio of 4.1% compared to 3.7% in the prior year, with the majority of
reviews hitting their maximum rental caps. The like-for-like rental growth for
properties held for a full year was 2.7%. A further £15.2 million of rental
income was also recognised from new acquisitions during the year, which were
purchased at an average NIY of 5.4%.
Administrative and other expenses, including management and advisory fees and
other costs of running the Group, were £15.4 million (30 June 2022: £13.9
million) generating an EPRA cost ratio (including direct vacancy costs) for
the year of 15.5% (30 June 2022: 16.5%).
Net financing costs for the year were £24.7 million (30 June 2022: £13.0
million). The increase in net financing costs reflects higher leverage in the
period, with the weighted average debt for the year being £672.3 million (30
June 2022: £491.4 million). The Company fixed 100% of its drawn debt during
the year which provided security during a time of significant interest rate
volatility (see financing and hedging section below). Subsequent to the year
end, the Company completed a debt refinancing exercise, maintaining its
weighted average maturity of debt to just over four years(45). At the same
time the Company extended the term of its hedging by 12 months, fixing 100% of
the Company's drawn debt at a weighted average cost of debt of 3.1%.
Net financing costs reflect a one-off non-recurring finance charge of £1.5
million, resulting from the acceleration of unamortised arrangement fees as a
result of the Company restructuring 50% of its debt from a secured to an
unsecured debt structure. Financing costs were further impacted by the upfront
amount payable to J.P. Morgan in respect of the short-term facility taken out
in January 2023 to fund the Group's purchase of BAPTL's 50% interest in the
Joint Venture.
The Group's operating profit, before changes in fair value of investment
properties and share of income from the joint venture, as reported under IFRS,
increased by 37.2% to £79.8 million (30 June 2022: £58.2 million).
The net decrease in fair value of the Direct Portfolio investment properties
in the year was £256.1 million (30 June 2022: £21.8 million increase), which
comprised of a £253.2 million valuation reduction in addition to £2.9
million of rent smoothing, lease incentive and rental guarantee adjustments.
As noted above, the decline in valuation reflects the outward shift in
property valuation yields due to rising interest rates and the macroeconomic
environment. As at 30 June 2023, the Group's EPRA NTA per share was 93 pence
(31 December 2022: 92 pence, 30 June 2022: 115 pence).
In January 2023, the Group increased its interest in the joint venture
relating to the SRP, with the acquisition of an additional 25% stake for
£188.8 million (excluding transaction costs). This was fully funded by a
short-term loan from J.P. Morgan, which was repaid in full on receipt of the
first tranche of proceeds received in March 2023 (see financing and hedging
section below).
The Company subsequently sold its stake in the SRP to Sainsbury's in March
2023. The share of income from the joint venture prior to disposal was £23.2
million (30 June 2022: £43.3 million). However, the share of income
(excluding fair value movements) in the year was £11.7 million (30 June 2022:
£12.2 million).
Following the sale of the Company's interest in the SRP, the Group generated
gross proceeds of £430.9 million, resulting in a profit on disposal of £19.9
million. The proceeds were structured in three tranches, where a receivable of
£136.4 million was recognised as at 30 June 2023.
The first tranche of £279.3 million was received on 17 March 2023 and the
second tranche of £116.9 million was received on 10 July 2023. The timing of
the third tranche of £34.7 million was conditional on the sale of the
remaining five stores in the SRP.
Four of the five stores were purchased by the Group for £61.6 million in
March 2023 and July 2023, utilising £33.3 million of the outstanding
receivable.
The Group is a qualifying UK Real Estate Investment Trust ("REIT") which
exempts the Group's property rental business from UK Corporation Tax(46).
Financing and hedging
During the year, the Group extended and broadened its banking relationships as
follows.
· In July 2022, the Group secured a new £412.1 million unsecured credit
facility with a bank syndicate comprising Barclays, Royal Bank of Canada,
Wells Fargo and Royal Bank of Scotland International. This was priced at 1.5%
above SONIA with a weighted average term of six years (inclusive of
uncommitted extension options).
· In September 2022, the Group agreed a further two-year extension
(inclusive of a one-year accordion option at the lender's discretion) of its
£150.0 million Revolving Credit Facility with HSBC. All other terms of the
facility remained unchanged.
· In January 2023, the Group secured a new £202.8 million secured debt
facility provided by J.P. Morgan. The Facility had an interest rate of 5.3%
and was fully repaid in March 2023 following receipt of £279.3 million in
respect of the first tranche of proceeds from the sale of the Group's interest
in the SRP to Sainsbury's.
· In March 2023, the Group refinanced its existing loan facilities with
Bayerische Landesbank, with a new three-year £86.9 million term loan fixed at
an all-in rate of 4.29%.
· Post year end, the Group completed a comprehensive debt refinancing
exercise securing a new £67.0 million facility with Sumitomo Mitsui Banking
Corporation ("SMBC") priced at 1.4% above SONIA, whilst reducing its HSBC
facility from £150.0 million to £50.0 million and cancelling its
Barclays/RBC facility of £77.5 million. The average maturity of the Group's
facilities (including extension options) is now over 4 years.
During the year, the Group made the decision to fix 100% of its floating rate
debt exposure. This was achieved by entering into three interest rate swaps.
This hedged £381.0 million of drawn floating unsecured debt for a weighted
average term of four years. The cost of acquiring the hedges was £35.5
million.
The Group also purchased an interest rate cap to fix the variable rate of
interest on £96.5 million of its Revolving Credit Facility with HSBC until
August 2024 for £6.0 million.
In March 2023, in line with the refinanced Bayerische Landesbank loan
facilities, the Group settled early its existing in-the-money hedges for this
facility for a profit of £2.9 million. The proceeds were used to enter into
new interest rate swaps that matched the terms of the new refinanced loan
facility of £86.9 million maturing in May 2026. The cost of acquiring the new
hedges was £2.8 million.
The interest rate derivatives entered into during the year had a weighted
average fixed rate on the associated debt of 3.1% (including margin). The cost
of acquiring these interest rate derivatives was £44.3 million and were
valued at year end at £54.3 million. The effect on the income statement for
the new derivatives for the period are a profit on fair value of the
derivatives of £10.0 million and finance income received from the quarterly
settlement of the derivatives of £9.7 million.
Post year end, the Group used the value of its existing in-the-money interest
rate hedges to extend the term of its hedging arrangements to match the
maturity of its extended debt facilities at no additional cost to the Company.
100% of the Company's drawn debt is now either fixed rate or hedged to a fixed
rate, representing a weighted average all-in cost of debt of 3.1%.
A summary of the Group's credit facilities as at the year end and after the
balance sheet date is provided below:
Lender Facility Maturity Extended Maturity* Margin Sonia/swap rate** Loan commitment (30-June-23) Amount drawn
£m (30-June-23) £m
Barclays and RBC Revolving Credit Facility Jan-24 Jan-26 1.50% SONIA 77.5 -
Bayerische Landesbank Term Loan Mar-26 Mar-26 1.65% 2.64% 86.9 86.9
Deka Bank Term loan Aug-24 Aug-26 1.35% 0.54% 47.6 47.6
Deka Bank Term loan Aug-24 Aug-26 1.35% 0.70% 28.9 28.9
Deka Bank Term loan Aug-24 Aug-26 1.40% 0.32% 20.0 20.0
HSBC Revolving Credit Facility Aug-24 Aug-25 1.65% 1.12% 96.5 78.1
HSBC Revolving Credit Facility Aug-24 Aug-25 1.65% SONIA 3.5 -
HSBC Revolving Credit Facility Aug-24 Aug-25 1.75% SONIA 50.0 -
Wells Fargo Revolving Credit Facility Jul-25 Jul-27 2.00% 0.19% 30.0 30.0
Wells Fargo Revolving Credit Facility Jul-25 Jul-27 2.00% SONIA 9.0 0.0
Unsecured Syndicate Revolving Credit Facility Jul-27 Jul-29 1.50% 1.34% 250.0 218.5
Unsecured Syndicate Term Loan Jul-25 Jul-27 1.50% 1.34% 100.0 100.0
Unsecured Syndicate Term Loan Jan-24 Jan-25 1.50% 1.34% 62.1 62.1
Total 862.1 672.1
Lender Facility Maturity Extended Maturity* Margin Sonia/swap rate** Loan commitment (Post balance sheet) Amount drawn
£m (Post balance sheet)
£m
Bayerische Landesbank Term Loan Mar-26 Mar-26 1.65% 2.64% 86.9 86.9
Deka Bank Term loan Aug-24 Aug-26 1.35% 0.54% 47.6 47.6
Deka Bank Term loan Aug-24 Aug-26 1.35% 0.70% 28.9 28.9
Deka Bank Term loan Aug-24 Aug-26 1.40% 0.32% 20.0 20.0
HSBC Revolving Credit Facility Sept-26 Sept-28 1.70% SONIA 50.0 -
SMBC Term Loan Sept-26 Sept-28 1.40% 1.57% 67.0 67.0
Unsecured Syndicate Revolving Credit Facility Jul-27 Jul-29 1.50% 1.76% 250.0 204.3
Unsecured Syndicate Term Loan Jul-25 Jul-27 1.50% 1.21% 50.0 50.0
Unsecured Syndicate Term Loan Jul-26 Jul-27 1.50% 1.48% 50.0 50.0
Wells Fargo Revolving Credit Facility Jul-25 Jul-27 2.00% 1.21% 30.0 30.0
Wells Fargo Revolving Credit Facility Jul-25 Jul-27 2.00% SONIA 9.0 0.0
Total 689.4 584.8
* Inclusive of uncommitted extension options
**Interest cost is inclusive of hedging arrangements where applicable. Amounts
stated do not include unamortised arrangement fees.
The overall facilities and hedging arrangements (including post balance sheet
events) have a weighted average debt maturity of 4 years (including extension
options) (30 June 2022: 4 years) and a cost of borrowing of 3.1% (30 June
2022: 2.8%).
The Group continues to have a conservative leverage policy, with a medium-term
LTV target of 30%-40%. At the year end, total net debt was £630.0 million,
resulting in a net loan to value (LTV) ratio of 37.4% (30 June 2022: 19.0%).
Including post balance sheet events, the Group's Gross LTV currently stands at
34.0%. The Group has further balance sheet capacity to utilise for
opportunities which may come to market.
Each of the loans under the secured credit facilities requires interest
payments only until maturity and are secured against both the subject
properties and the shares of the property-owning entities. Each
property-owning entity is either directly or ultimately owned by the Group.
Each of the loans under the unsecured credit facilities requires interest
payments only until maturity.
The Group continues to maintain significant headroom on its LTV covenants
which contain a maximum 60% LTV threshold and a minimum 190% interest cover
ratio for each asset in the Portfolio. As at 30 June 2023, the Group could
afford to suffer a fall in secured property values of 48% before being in
breach of its LTV covenants. With current hedging arrangements in place the
Group has significant interest cover headroom.
Further analysis on the Group's liquidity and banking covenant compliance
strength is set out in note 1 to the financial information. Details of the
Group's debt and interest rate hedging can be found in Notes 20 and 21 to the
financial information.
Dividends
The Company has declared four interim dividends for the year as follows.
· On 21 September 2022, a first interim dividend of 1.5 pence per share,
which was paid on 16 November 2022.
· On 12 January 2023, a second interim dividend of 1.5 pence per share,
which was paid on 23 February 2023.
· On 11 April 2023, a third interim dividend of 1.5 pence per share,
which was paid on 26 May 2023.
· On 6 July 2023, a fourth interim dividend of 1.5 pence per share,
which was paid on 4 August 2023.
The Group's adjusted dividend cover ratio was 0.97x for the year (30 June
2022: 1.08x). The decrease is reflective of the increased debt levels of the
Group for the year, interest rate increases and the timing of the receipt of
the SRP proceeds to reinvest into increasing the earnings of the Group.
The Company is targeting to increase the dividend for the year to 30 June 2024
to 6.06 pence per share, which will be the sixth consecutive year of annual
dividend increases.
Atrato Capital Limited
Investment Adviser
19 September 2023
TCFD COMPLIANT REPORT
ESG Statement
The UK is targeting Net Zero emissions by 2050. Achieving this will require
the full commitment of the real estate sector, among many others. Supermarket
Income REIT plc acknowledges that it has a role to play within that commitment
and therefore must identify and manage its sustainability risks accordingly.
The Company believes that this approach aligns with the interests of its key
stakeholders.
Enhanced collaboration between landlords and tenants is necessary if zero
carbon initiatives are to be successful and the Company is especially focused
on this, given the (full repairing and insuring) nature of the majority of its
leases. The Company's sector has proved itself to be agile in times of
hardship through the "feed the nation" enterprises; now is the time to deliver
on zero carbon initiatives throughout its operations.
In addition to the Company's disclosures in line with the Task Force on
Climate-related Financial Disclosures (TCFD) recommended disclosures, the
Company will publish its first Sustainability Report in 2023. The
Sustainability Report contains disclosures on other environmental, social and
governance (ESG) topics, including outlining the Company's work to consolidate
its approach, by integrating sustainability into all levels of the fund and
its investment process.
Highlights from the Sustainability Report, beyond the Company's
climate-related activities and commitments, will include environmental asset
management initiatives to benefit occupiers and communities, further
improvements to its ESG Governance following the establishment of the ESG
Committee during FY 2022, and community engagement through charitable giving
and community partnerships.
The Company's approach to ESG is underpinned by the Board's commitment to good
stewardship and long-term value creation for our stakeholders. Our aim is to
continue to enhance and refine our sustainability strategy and reporting
moving forward.
Streamlined Energy and Carbon Reporting ("SECR")
The below table and supporting narrative summarise the Streamlined Energy and
Carbon Reporting (SECR) disclosure. As a listed entity, the Company is
required to comply with the Streamlined Energy and Carbon Reporting (SECR)
regulations under the Companies (Directors' Report) and Limited Liability
Partnerships (Energy and Carbon Report) Regulations 2018. Only data for the
year ended 30 June 2023 is included as this is the Company's first year of
SECR.
Reporting year Current reporting year:
1(st) July 2022 - 30(th) June 2023
Location UK
Emissions from the combustion of fuel and operation of facilities (tCO(2)e) 10
(Scope 1)
Emissions from purchase of electricity (location-based) (tCO(2)e) (Scope 2) 101
Emissions from business travel in rental cars or employee-owned vehicles where N/A
company is responsible for purchasing the fuel (tCO(2)e) (Scope 3)(47)
Voluntary: Emissions from Fuel and Energy related activity (tCO(2)e) (Scope 3) 37
Voluntary: Emissions from Purchased Goods and Services (tCO(2)e) (Scope 3) 3,132
Voluntary: Emissions from Capital Goods (tCO(2)e) (Scope 3) 463
Voluntary: Emissions from Downstream Leased Assets (tCO(2)e) (Scope 3) 77,274
Total gross emissions based on the above (tCO(2)e)(48) 81,017
Energy consumption used to calculate Scope 1 emissions (kWh) 606,629
Energy consumption used to calculate Scope 2 emissions (kWh) 521,321
Energy consumption used to calculate Scope 3 emissions (kWh)(49) 186,704,059
Total energy consumption based on above (kWh) 187,832,009
Intensity ratio: tCO(2)e (gross Scope 1 + 2) per m(2) of floor area 0.00045
Intensity ratio: tCO(2)e (gross Scope 1, 2 + 3) per m(2) of floor area 0.13
Methodology
The 2022/23 SECR footprint is equivalent to 81,017 tCO(2)e, with the largest
portion being made up of emissions from downstream leased assets at 77,273
tCO(2)e.
The Company has calculated the above greenhouse gas (GHG) emissions to cover
all material sources of emissions for which the Company is responsible. The
methodology used was that of the Greenhouse Gas Protocol: A Corporate
Accounting and Reporting Standard (revised edition, 2015). Responsibility for
emissions sources was determined using the operational control approach. All
emissions sources required under The Companies (Directors' Report) and Limited
Liability Partnerships (Energy and Carbon Report) Regulations 2018 are
included.
Raw data captured in spreadsheets including energy spend and consumption data
has been collected from the Company. Where actual consumption data was
available for natural gas and electricity use, this was used. To address data
gaps, the most appropriate proxy was applied by using either previous year's
data, actual data to calculate average monthly consumption, or by applying the
average floor area intensity from sites with actual data. Fuel oil was
estimated by applying the average 2022 UK fuel oil price to the budgeted spend
for fuel oil. Energy was then converted to GHG emissions using the UK
Government's GHG Conversion Factors for Company Reporting 2022.
Scope 3 emissions have been calculated for relevant material categories using
consumption data, spend data, floor area and EPC data. Fuel and Energy related
activities includes well-to-tank ("WTT") and transmission and distribution
("T&D") upstream emissions from Scope 1&2. For Purchased Goods and
Services, Environmentally Extended Input Output ("EEIO") has been used. Spend
data was provided per supplier by the Company's Finance team and mapped to
2022 DEFRA Input/Output ("IO") categories. Embodied emissions from two newly
built sites were estimated for Capital Goods, based on LETI factors. Where
actual data was not available for Downstream Leased Assets, a combination of
CIBSE benchmarks were used against EPC data on energy use and heating type.
Publicly available air conditioning ("AC") certificates were used to determine
the type and amount of refrigerants, where this was not available other
similar sites were used as proxies. As per EPA data, the size of the air
conditioning equipment used was dependent on the amount of refrigerant used
and the floor area. Supermarket refrigeration and non-food air conditioning
was estimated using an intensity estimate from EPA data as no activity data
was available. Refrigerant loss rate for refrigeration was taken from Direct
Emissions from Use of Refrigeration, Air Conditioning Equipment and Heat Pumps
from DEFRA.
Energy Efficiency Action
The Company has made efforts to improve energy efficiency across
landlord-controlled areas between 1 July 2022 and 30 June 2023. The car park
and communal lighting has been upgraded to LED at Winchester, West End Retail
Park (50% complete), Willow Brook Centre (99% complete) and Wisbech sites.
Further upgrades to LED lighting are planned for other sites. The Company is
also in the process of replacing the Air Handling Unit at the Beaumont Leys
site and implementing a sustainable heating solution for the mall. A Battery
Management System upgrade, PIR controls and monitoring and education has also
been put in place at the Willow Brook Centre.
Taskforce on Climate-Related Financial Disclosures (TCFD)
Introduction
The effects of climate change are impacting countries, businesses and society
in many ways. Such impacts will continue to increase if significant mitigation
measures are not taken by all contributors. The UK commercial real estate
industry is not immune from these effects and faces numerous risks associated
with climate change that could impact the industry in the near and long-term.
These risks include, but are not limited to, flooding and heat waves,
impacting tenant operations and supply chains, as well as regulatory actions
requiring emissions reductions and energy efficiency improvements. Along with
these risks also come opportunities for improving the industry's readiness,
which could offer valuable contributions to mitigation of climate change's
impacts and associated risks.
Supermarket Income REIT plc is dedicated to mitigating climate-related risks,
reducing its environmental impact and managing its climate-related risk
exposure. In anticipation of, and in response to, the impacts that these risks
pose to the Company, its tenants and stakeholders, the Company continues to
build out an effective governance structure and put measures in place to
enhance its climate risk management strategy. The Company is supported by
Atrato Capital Limited (the "Investment Adviser") which, as a signatory of the
United Nations' Principles for Responsible Investment (UNPRI) and the Net Zero
Asset Managers (NZAM) Initiative, is committed to assisting the Company
achieve its sustainability and climate goals to combat the climate crisis.
The Company continues to build on its voluntary reporting in line with the
taskforce on Climate-related Financial Disclosure (TCFD) recommendations and
enhance its climate-related strategy to advance the development and
implementation of a comprehensive risk management framework. This strategy,
developed by the Investment Adviser, in conjunction with the Board of the
Company, will include a roadmap derived from climate risk identification,
scenario analysis and a financial impact assessment of material risks. This
collaboration between the Investment Adviser and the Board helps to ensure
that the Company's investments will continue to be guided by a comprehensive
risk management strategy that incorporates climate risks.
In 2022, the Company reported against the four TCFD pillars in its
TCFD-aligned report. In 2023 the Company is voluntarily disclosing for the
first time on a basis consistent with all 11 of the TCFD recommendations and
recommended disclosures.
Table 1 summarises the 2023 disclosures and areas identified for improvement
in future years.
Table 1: The Company's TCFD Statement of the Extent of Consistency with the
TCFD Framework
TCFD Category TCFD Recommendation 2023 TCFD compliance Future planned improvements
Governance Describe how the board exercises oversight of climate-related risks and Consistent - see Governance section N/A
opportunities.
Describe management's role in assessing and managing climate-related risks and Consistent - see Governance section N/A
opportunities.
Strategy Describe the climate-related risks and opportunities the organisation has Consistent - see Strategy section Expand upon risk and opportunity identification processes to include
identified over the short-, medium-, and long-term. engagement with tenants.
Ongoing process 2024
Describe the impact of climate-related risks and opportunities on the Consistent - see Table 2 Refine and publish quantitative, financial impacts.
organisation's businesses, strategy, and financial planning.
To be completed by Q1 2024
Describe the resilience of the organisation's strategy, taking into Consistent - see Strategy section Build upon the Science Based Target (SBT) road map into a more detailed
consideration different climate-related scenarios, including a 2°C or lower Climate Transition Plan.
scenario.
Q2 2024
Risk Management Describe the organisation's processes for identifying and assessing Consistent - see Risk Management section Expand on climate risk and opportunity identification.
climate-related risks.
Q2 2024
Describe the organisation's processes for managing climate-related risks. Consistent - see Risk Management section Formalise climate-related communication channels with tenants.
Q2 2024
Describe how processes for identifying, assessing, and managing climate- Consistent - see Risk Management section N/A
related risks are integrated into the organisation's overall risk management.
Metrics and Targets Disclose the metrics used by the organisation to assess climate-related risks Consistent - see Metrics and Targets - Table 3 N/A
and opportunities in line with its strategy and risk management process.
Disclose Scope 1, Scope 2 and, if appropriate Scope 3 greenhouse gas (GHG) Consistent- see Greenhouse Gas Emissions section N/A
emissions and the related risks.
Describe the targets used by the organisation to manage climate-related risks Consistent- see Metrics and Targets section Work is currently ongoing to model emissions reductions, develop a roadmap to
and opportunities and performance against targets. reduce those emissions and submit a target to the Science Based Targets
initiative (SBTi).
Q4 2023
Governance
Describe how the board exercises oversight of climate-related risks and
opportunities:
The Board and the Alternative Investment Fund Manager ("AIFM") are responsible
for the investment decisions of the Company and directing the delivery of
services by the Investment Adviser to ensure that climate-related priorities
are incorporated into the execution of the investment strategy. In support of
this objective, the Board established the ESG Committee in May 2022 to ensure
that the Company's climate related issues are integrated into its business
plan and corporate performance objectives. Following the 2023 reporting
process, the Board will consider the annual budget implications of the
inaugural climate scenario analysis results and will also consider updating
risk management policies as is deemed appropriate.
The Board appoints the members of the Committee, which has the delegated
authority of the Board to monitor the integrity and quality of the Company's
climate risk strategies, as well as to track progress against climate-related
goals and targets, which will be presented to the Board on a quarterly basis.
Many of these goals and targets are new to 2023 (documented within Table 3
below) and are in the process of being embedded within Board presentations.
The Investment Adviser is responsible for advising the Board and ESG Committee
in matters related to climate risk and the Investment Adviser's Head of
Sustainability is responsible for delivery of these services on behalf of the
Investment Adviser. The Board also engages with third party advisers to
develop its understanding of climate-related risks and how they apply to the
Company.
Figure 1: Governance structure related to climate-related risks and
opportunities
Describe management's role in assessing and managing climate-related risks and
opportunities:
Investment Adviser
The Investment Adviser is responsible for the delivery of the climate risk
strategy on behalf of the Company. Steve Windsor, Principal and Sustainability
Champion at the Investment Adviser, is responsible for oversight, monitoring
and management of climate-related risks and opportunities. The Investment
Adviser's Head of Sustainability is responsible for the operational delivery
of climate-related risks and opportunities measures within the Investment
Adviser's operations and leads the provision of climate risk advice to the
Company.
The Head of Sustainability is a standing attendee at the Investment Adviser's
Investment Committee, assuming responsibility for implementation and alignment
with the Investment Adviser's sustainability systems and controls,
co-ordination of third-party service providers, and delivery of the Company's
sustainability strategy.
Where the Company has appointed a specialist service provider, the Investment
Adviser will require and hold regular project progress meetings with the
service provider, where delivery is tracked against an agreed project
timeline. The results of the progress will be communicated to the ESG
Committee by the Investment Adviser in the context of its progress against the
agreed sustainability strategy.
Reporting - The Investment Adviser has reviewed its reporting obligations to
the Company over the year. With the introduction of the ESG Committee, key
topics such as strategic developments, occupational health and safety events,
and potentially material adverse impacts will be reported under a more
consistent framework.
Certain topics will be included as standing items in the quarterly information
pack provided to the ESG Committee. These are designed to:
1. Provide Committee members with the ability to directly monitor
management of the identified climate related risks and opportunities. This
will include Energy Performance Certificate ("EPC") ratings and progress
against the delivery of the sustainability plans for the higher risk assets,
flood risk assessments and updates on and feedback from the tenant engagement
plan;
2. Oversee the Investment Adviser's performance against the agreed
deliverables under the sustainability strategy as well as holding it to
account for non-performance.
The Investment Adviser has also sought to expand its external reporting,
having become a signatory to both UNPRI and NZAM. It will be making the
necessary reports required under these commitments over the next reporting
period. Finally, the Investment Adviser has improved its data collection in
relation to its own activities to support the public disclosures of the
Company, in particular the social and governance aspects.
Sustainability Strategy and Benchmarking - The sustainability activities of
the Investment Adviser are supplemented by services from third party
providers. During the financial year, the Company has sought advice from
CEN-ESG on improvements it can make to its sustainability strategy and
framework, as well as undertaking a benchmarking exercise to assess the
Company's sustainability strategy delivery against its peer group.
The outcome of this exercise has been the development of a gap analysis for
more holistic, ESG disclosures against best practices and against the
Company's peer group. The consultants provided advice on climate and other ESG
disclosure expectations of the independent sustainability rating agencies, and
the consequential improvements required by the Company and Investment Adviser
in this regard. These recommendations have been reflected in the Company's
sustainability strategy, against which the ESG Committee tracks the Investment
Adviser's progress against the agreed deliverables.
These additions have also been included in the review of the Company's
Sustainable Investment Management System (SIMS) which was developed
concurrently.
Systems and controls - The Investment Adviser has appointed specialist
sustainability systems experts, Quarter Penny Consulting Ltd to expand its
sustainability systems and controls to ensure they are effective in delivering
the Company's sustainability strategy. Identification of climate-related risks
already forms part of the Investment Adviser's investment process. However,
this has been expanded to ensure more accurate data collection and asset level
risk analysis. These changes which the Company is in the process of
implementing include:
- Expansion of the existing asset level sustainability improvement tracking
to include asset level plans and the introduction of greater oversight of
their delivery;
- Active analysis and monitoring of flood risk on a location specific
basis under different climate scenarios;
- Formalising a tenant engagement policy with standardised information
request templates;
- Formalising use of the legal risk register to monitor applicable
regulatory and legal changes.
Such systems and controls will continue to be reviewed and improved in
response to the climate scenario analysis performed in Q2 2023.
Strategy
Describe the climate-related risks and opportunities the organisation has
identified over the short-, medium-, and long-term:
During the reporting period, the ESG Committee approved an updated climate
risk strategy for the Company in line with its continual improvement ethos. In
addition to the review and revision of the Company's previous sustainability
commitments, the strategy identified three key aims for the 2022/23 reporting
period.
- Expansion of reporting in-line with TCFD application guidance.
- Introduction of climate-related performance targets for the
Investment Adviser.
- Further review and development of the Investment Adviser's systems
and controls.
The Board and ESG Committee recognise that to ensure successful implementation
of the Company's sustainability strategy, and specifically the integration of
sustainability factors into the investment process, appropriate training and
communication of sustainability considerations must be provided to the
Investment Adviser's employees. The Investment Adviser will therefore expand
its training programs over the course of the year to more fully incorporate
climate risk topics, which it will continue to develop in line with
stakeholder expectations and sector developments.
For this reporting period, a first stage risk screening was conducted to
identify and assess the impact of the Company's climate-related transition and
physical risks, as well as corresponding opportunities. Relevant and
potentially material risks and opportunities were identified through a review
of existing risk assessments and consultation with the Investment Adviser.
These risks were given a 'First Stage Rating', based on the judgement of the
Investment Advisers, to enable the higher priority risks to be taken forward
for a more detailed review.
The short-, medium-, and long-term time horizons were chosen to align with
specific climate risks and risk management strategies. The short-term time
horizon (2023-2030) aligns to the anticipated compliance deadline for Minimum
Energy Efficiency Standards ("MEES"). The Investment Adviser anticipates 2030
as the target year for a minimum B-rating across qualifying sites. Due to the
14-year WAULT of its portfolio, the Company expects few changes to the
existing leases arrangements during this time period. The medium time
horizon (2030-2040) aligns with a period of current lease renewals for the
majority of Company's tenants, during which physical and transition risks
associated with the Company's portfolio may have greater influence on lease
agreements with existing and new tenants. Finally, the long-term horizon
(2040-2050) coincides with a potential increase in the likelihood and severity
of physical climate risks impacting the Company's portfolio and allows for the
creation of long-term strategies and planning regarding portfolio management
in response to these risks. The Company expects that the short-, medium-, and
long-term horizons will align with those of the Company's forthcoming climate
targets, which will be set in the next reporting period.
Table 2 | Scenario analysis results for the Company's climate risks and
opportunities and First Stage risk rating
Risk description Scenario ((a)) Impact((b)) Likelihood(I) Overall Rating((d)) by Time Horizon
Short (2023-2030) Medium (2030-2039) Long (2040-2050)
Physical Risk - Flooding (Acute & Chronic): Increased insurance premiums First Stage Rating Higher Higher Moderate Higher Higher
and increased capital expenditure required on adaptative or remediation
measures.
Below 2(o)C Scenario Moderate Higher Moderate Moderate Moderate
Above 4(o)C Scenario Moderate Higher Moderate Moderate Moderate
Physical Risk - Extreme Heat (Acute): Increasing operating costs for tenants First Stage Rating Moderate Higher Moderate Higher Higher
through increased energy demand required for cooling; supply chain disruption,
stock damage and write off. This may increase capital expenditure, repairs and
maintenance, and reduced tenant demand and/or rent premiums for less energy
efficient buildings.
Below 2(o)C Scenario Moderate Lower Lower Lower Lower
Above 4(o)C Scenario Moderate Lower Lower Lower Moderate
Transition Risk - Policy and Legal Risk: Currently represented by Minimum First Stage Rating((d)) Moderate Higher Higher Higher Moderate
Energy Efficiency Standards (MEES), but could also include, new, future,
additional regulations. Any properties not compliant with MEES could reduce
tenant demand, reduce rent premiums or result in fines.
Below 2(o)C Scenario Higher Moderate Moderate Moderate Moderate
Above 4(o)C Scenario Higher Lower Lower Lower Lower
Transition Risk - Market: Energy Costs may increase for tenants, shifting First Stage Rating Moderate Moderate Moderate Moderate Moderate
preferences for more energy efficient buildings and renewables.
Below 2(o)C Scenario n/a - scenario analysis not performed for this risk type
Above 4(o)C Scenario
Transition Risk - Reputation: Tenants demand preferences may shift to lower First Stage Rating Moderate Moderate Moderate Moderate Lower
carbon, highly energy efficient buildings, due to Net Zero commitments and
their customer demands, reducing tenant demand and/or rent premiums.
Below 2(o)C Scenario n/a - scenario analysis not performed for this risk type
Above 4(o)C Scenario
Opportunity - Market: By accelerating deployment of energy efficient measures, First Stage Rating Moderate Moderate Moderate Moderate Lower
setting a Science Based Target (SBT) and better aligning with tenant
preferences, the Company could gain a competitive advantage relative to other
commercial landlords who are not as progressive on in their climate and
sustainability related ambitions. This could enable increased tenant demand
and rent premiums.
Below 2(o)C Scenario n/a - scenario analysis not performed for this risk type
Above 4(o)C Scenario
Notes:
(a) The IPPC Atlas' RCP2.6 scenario and the NGFS's Net Zero 2050 scenario
are assumed to represent "Below 2°C scenarios" for physical and transition
risks respectively. Above 4(o)C scenarios were included voluntarily for
prudent, comparative purposes, and are based on the IPPC Atlas' RCP8.5
scenario and the NGFS's Current Policies scenarios for physical and transition
risks respectively.
(b) Impact represents assumed, inherent financial exposure and/or
vulnerability of the Company.
(c) Likelihood represents the probability and/or frequency of occurrence.
(d) Overall Rating represents the product of Impact and Likelihood.
(d) First Stage ratings were based on initial internal discussions and
comparison with peer organisations. The top three risk types with relatively
higher ratings for impact and likelihood were then taken forward for more
detailed scenario analysis in 2023.
Please see Appendix A for further details on the methodology.
(e) Subsidence was not selected to be included in scenario analysis this
year, but it was identified as a climate risk alongside Flooding and Extreme
Heat.
The three climate risks and/or opportunities judged to be the most material
and assigned the highest overall risk or opportunity rating in the initial
risk screening were evaluated using climate scenario analysis. The results of
this analysis are shown in Table 2. The scope of this detailed analysis will
be expanded in future years to evaluate more risk and opportunity types and to
better quantify the financial impacts associated with these risks. Additional
risks to be evaluated include energy costs and customer and tenant demand for
lower carbon buildings, while opportunities include gaining a competitive
advantage over peers by offering assets with higher energy efficiency ratings.
Quantitative financial values at risk have not been published this year, as
the corresponding costs of managing the risks require further research and
greater access to and engagement with tenants. This research and engagement
will be performed over the next 12 months. This is considered to be a
transitional challenge as the Company's scenario analysis methodology is
developed and embedded.
Describe the impact of climate-related risks and opportunities on the
organisation's businesses, strategy, and financial planning:
The Company's ability to evolve its commercial strategies to reflect the
relevant climate-related risks and opportunities identified, will be
fundamental to its continued success. This will include considering the
risks and opportunities within specific activities, such as:
Acquisitions - The Investment Adviser has already adapted its asset sourcing
criteria and approach to acquiring new assets.
- No asset with an EPC below C can be acquired unless a demonstrable
EPC improvement plan is developed, the cost of which is reflected in the
investment case for the asset acquisition.
- Consideration is given to the costs required to improve all assets
to EPC B, based on current anticipated legislative changes.
- A sustainability review is completed for all assets.
- Opportunities for the installation of energy efficiency and renewables
technology in support of the Net Zero transition are considered as part of the
investment case.
- The credit standing of the Company's tenants is assessed in the
context of their ability to manage climate related risks and opportunities.
As the Investment Adviser continues to embed the SIMS it will also undertake
additional due diligence including future flood risk assessments under
alternative climate scenarios.
Asset Management - The Investment Adviser already maintains records relating
to the delivery of sustainability initiatives across the Company's portfolio.
Priority initiatives will be defined through this risk and opportunity
identification process and combined with initiatives previously identified
through to the Company's engagement with tenants, the acquisition due
diligence process. Current example initiatives include feasibility assessments
for installation of renewable energy solutions or electric charging points.
The Investment Adviser's progress against these plans is reviewed monthly
with the Head of Sustainability and at asset management planning meetings with
site managers.
Financial planning - The majority of the Company's assets are on long-term
full repairing and insuring (FRI) leases. The maintenance and operation of the
assets, including improvements necessary to achieve the required EPC
improvements and the tenant's own Net Zero targets are therefore the
responsibility of the tenant during the term of the lease. The Company's
approach to financial planning is reflective of this and includes the
following activities.
- Assessment of the costs of improving all assets to an EPC B. This is
currently underway and has not yet been formally reflected in the Company's
financial planning as it is likely that the asset improvement costs may be
shared, at least in part, with its tenants, which requires further engagement.
- On-going monitoring of the likelihood of potential asset level
risks. This may prompt a future change to asset values, provisions for
increased insurance premiums and/or increased future rectification costs.
- Updates to the future budgeting process to incorporate the costs of
appointing suitable advisers to support its risk assessment and reporting
requirements.
- Updates to the future budgeting process to incorporate additional
acquisitions costs to support the more detailed due diligence around climate
related risks and opportunities.
Access to Capital - Access to both debt and equity capital will increasingly
require the Company to align with the financial community's requirements for
robust climate risk and opportunity management and activities relating to Net
Zero. The Company's sustainability strategy is designed to address this
through:
- Regular engagement via the Investment adviser with Shareholders to
understand their requirements and to ensure timely responses to their own
sustainability due diligence.
- Increased transparency over risks and opportunities and how they are
being managed; which includes this TCFD report.
- Independent review and support in the preparation of climate related
disclosures by third party advisers.
- Horizon scanning for sustainability initiatives to be implemented by
relevant regulators.
- Ongoing dialogue with debt funders around their sustainability
policies including relevant lending exclusions and funding incentives linked
to green lending criteria.
Describe the resilience of the organisation's strategy, taking into
consideration different climate-related scenarios, including a 2°C or lower
scenario:
Each risk type with Moderate-Higher First Stage Ratings have been considered
under two future scenarios. The future scenarios are the IPCC's Representative
Concentration Pathway (RCP) 2.6 IPCC RCP8.5. The RCP2.6 scenario describes a
scenario where global temperature increases remain below 2°C as a result of
sharp decreases in emissions, whilst the RCP8.5 scenario describes a scenario
commensurate with much higher emissions and subsequent temperature increases
(around 4°C of warming). These scenarios have been included in analysis on
the basis that they represent a low-emissions future scenario as well as a
high-emissions future scenario.
Policy and Legal
The Company's current, key regulatory risk is associated with the MEES. MEES
impacts the Company's portfolio of assets by requiring that each asset
achieves minimum EPC ratings in order to be leased. It is acknowledged that
within the RCP2.6 scenario, other policy and legal changes may be introduced
in addition to, or in-place of the current MEES regulation. Therefore, this
risk is intended to represent a broader suite of future climate Policy and
Legal interventions. Current MEES readiness and EPC ratings serve as only one
indicator for how vulnerable the Company is to the broader risk of
climate-related Policy and Legal changes. Other vulnerability indicators
include tenant lease term. The likelihood rating is based on the proxy of
global carbon price data, on the rationale that in future scenarios with
higher carbon prices, there is an increased likelihood of policies, such as
MEES, that discourage emissions. In the RCP2.6 scenario, carbon prices
increase more rapidly in the short-term than under the RCP8.5 scenario.
Further details of this approach have been included in Appendix A.
Currently, the MEES regulation sees compliance as a landlord responsibility,
is applied to all commercial leases (subject to some exemptions) and dictates
that a property with an EPC lower than an 'E' cannot be let to new tenants or
renewed with existing tenants. Revisions to the legislation are currently
under consultation, but it is widely anticipated that landlords, including the
Company, will be required to ensure their properties are rated at C or better
by 2028 and B or better by 2030 to continue to lease the properties to
tenants. Although, as aforementioned, these regulations are subject to
exclusions.
The Company's leased supermarket assets in England currently achieve an
average rating of C, with 8 of 50 (16%) rated at D or worse. The Company has
undertaken an exercise to understand the capital expenditure required to bring
the portfolio up to a lettable standard, should the legislation progress as is
anticipated (i.e. B by 2030). Based on the Investment Adviser's initial
analysis of the upgrade costs, these are not expected to be material for the
Company. However, the Company is actively engaging with tenants to improve
asset energy efficiency, where possible, since an asset with a lower rating
could invite lower demand and rental income relative to an asset with a
comparatively higher rating. This is likely to be of greater concern to the
Company over the medium term when the majority of its leases will be due for
renewal. While the landlord is not able to make change without consent from
the tenants, the landlord may register an exemption should the tenant not
permit access and alterations to facilitate improvement.
As a result of this analysis, the Company will be evaluating the capital
refurbishment plans on those sites with lower EPC ratings and ensuring that
robust plans are in place to comply with, if not exceed, future MEES
regulations. The financial impact of this risk will be assessed in future
analysis.
Extreme Heat
Heat waves have increasingly impacted businesses in the UK and across Europe,
with average impacts estimated as high as 0.5% of GDP in the last decade (link
(https://www.nature.com/articles/s41467-021-26050-z#:~:text=During%20the%20analysed%20years%2C%20heatwaves,2010%20due%20to%20extreme%20heat)
). The heat wave in July 2022 saw UK temperatures rise above 40°C in some
areas, impacting grocery store refrigeration capability, energy supply, supply
chains and operations. Such events impact store profitability as they lead to
increased energy consumption and associated costs to facilitate greater levels
of cooling. Other impacts include stock loss and the cost of newer, more
efficient refrigeration technology. If this were to disproportionately impact
the Company's stores this could reduce their attractiveness to the operators,
leading to impacts on rental income.
The results of the scenario analysis show that heat waves are generally a low
risk for the Company's portfolio in the RCP2.6 scenario, with temperatures
rising above 35°C fewer than one day per year on the short-, medium-, and
long-term horizon. In the RCP8.5 scenario, this risk increases but remains low
compared to global risk levels, with the number of days with temperatures of
35°C or greater increasing to over three days per year on average. Higher
risk sites were mainly located in the South West, with the remaining located
in the Midlands and the South East of England.
Informed by this analysis, the Company will engage with tenants of higher risk
sites through site visits and engagement to better understand the operational
impacts as a result of extreme heat, if and how it has affected asset
operations at these locations in the past, and the extent to which it may
influence a tenant's decision to renew its lease. Tenants are continuing to
advance their own refrigeration and supply chain technology alongside the
changing environment, with refrigeration upgrades at stores where the
equipment is aged, reducing any stock loss associated with inadequate
refrigeration.
Flooding
While there have been no instances of flooding across the Company's portfolio
during its period of ownership, flooding has in some locations impacted other
supermarket properties across the UK. This impact is expected to increase over
time due to climate change (see WWF Water Risk Filter). Scenario analysis
results for the Company's portfolio show flood risk to be moderate on the
short and medium-term time horizons in the RCP8.5 scenario. This risk level is
reflective of the higher risk level that the UK faces relative to many other
countries. The scenario analysis highlighted regional differences in risk
levels within the Company's portfolio, with higher risk sites distributed
equally across the South East, South West and Midlands, with Wales, the North
East and North West comparatively lower risk.
These results will inform tenant engagement across the portfolio regarding
flood risk, including enhanced communication for any higher risk sites
identified. Furthermore, the Company has undertaken a closer review of past
flood risk assessments to understand what adaptation measures are available
and the capital investment required for such measures. Detailed financial
impacts of this risk will be quantified over the next 12 months. The
Investment Adviser will be reviewing its investment due diligence and
exploring if more detailed analysis of acute and chronic flood risk impacts
can be embedded into its investment strategy and decisions.
Risk Management
Describe the organisation's processes for identifying and assessing
climate-related risks:
The Company's approach to risk assessment is as set out in the Our Principal
Risks Section on pages 71 to 84.
The Board and JTC Global AIFM Solutions Limited, the Company's Alternative
Investment Fund Manager (the AIFM), together have joint overall responsibility
for the Company's risk management and internal controls, with the Audit and
Risk Committee reviewing the effectiveness of the Board's risk management
processes on its behalf. The ESG Committee is responsible under the delegated
authority of the Board for the identification and monitoring of climate
related risks which are incorporated into the risk management process.
The ESG Committee will consider both physical risk factors such a flood risk
as well as existing and future, emerging regulatory risks, including the
implications of the introduction of MEES. Additionally, the Investment Adviser
seeks to ensure climate related risks are a standing item when engaging with
the Company's tenants. Such engagement occurs multiple times per year and more
frequently with larger site tenants. Where relevant to do so, it will formally
incorporate any risks identified through that engagement channel into the
Company's risk register over the next 12 months.
Materiality of climate related risks and opportunities is determined based on
their relative likelihood and potential financial impact. This is a process
that has been reviewed and will continue to be enhanced over the course of
2023. At present, the Company's finance team have fed into a 'First Stage
Rating', which has enabled the process of financial quantification to commence
via the scenario analysis for selected risks. Once the risk quantification is
complete, it will allow a more robust assessment of materiality to be made.
Describe the organisation's processes for managing climate-related risks:
The Investment Adviser undertakes an assessment of each asset against a set of
sustainability criteria, incorporating metrics such as a flood risk assessment
into each transaction review. The Company will not recommend the acquisition
of assets with an Energy Performance Certificate (EPC) of D or below unless a
deliverable EPC improvement plan is in place, prior to acquisition, to improve
an asset to an EPC rating of C or better. The cost of delivering the EPC
Improvement plan forms part of the acquisition investment case.
Materiality and prioritisation determinations are made through impact,
likelihood, and risk scoring as a part of the risk register. Inherent and
residual probabilities are assigned to each risk, from which a risk score is
derived. Mitigating actions are described in detail in the risk register,
laying out governance structure and processes in place aimed at mitigating
each risk. Finally, actions taken to mitigate risks are tracked and recorded
in the register.
Regulatory transition risks associated with the Company's portfolio are
assessed and included in the risk register. EPC ratings and scoring are
updated on a rolling basis when there are known sustainable improvements to
assets, on expiry or following a change to EPC calculation methodology. These
ratings, as the Company's responsibility, are undertaken by the Company's
consultants when required. The Company strives to acquire assets with higher
EPC ratings in order to mitigate exposure to this risk. This is reflected in
the Investment Adviser's systems and controls.
Describe how processes for identifying, assessing, and managing
climate-related risks are integrated into the organisation's overall risk
management:
The Company's approach to risk assessment is as set out in the Our Principal
Risks Section on pages 71 to 84.
The Company manages its risk related to emissions regulations by monitoring,
measuring, and disclosing its Scope 1, 2, and 3 GHG emissions. Emissions
mitigation strategies, including specific emissions targets, are being
developed to reduce the Company's emissions and to reduce exposure to this
regulatory risk.
Rising energy costs are a key transition risk, as tenants facing rising
energy, or other, costs would put downward pressure on rent revenue. To manage
this risk, the Investment Adviser prioritises energy efficiency and
alternative energy sources, such as renewable energy, in communications with
tenants. Energy efficiency and energy sources are tracked as part of the EPC
assessments and this information is used to inform risk exposure related to
rising energy costs.
The Company's identified physical climate risks include flooding, heat waves,
and subsidence. Flood risk across the UK has historically been high and this
risk is expected to increase, per the UK's Third Climate Change Risk
Assessment
(https://www.gov.uk/government/publications/uk-climate-change-risk-assessment-2022)
. Should there be an incidence of flood, it is anticipated that a flooding
report would be submitted by the tenants to the Investment Adviser. These can
be consulted to inform the Company's risk and investment strategy.
The Company's tenants maintain their own risk registers related to their
site's facilities and property. As part of building on its risk management
processes, the Investment Adviser plans to link the material site-specific
risks of the Company's tenants to the Company's own risk register. In
addition, as part of their Scope 3 emissions initiatives, the Investment
Adviser plans to engage tenants through this process in order to enhance
dialogue related to emissions reductions strategies.
Metrics and Targets
Disclose the metrics used by the organisation to assess climate-related risks
and opportunities in line with its strategy and risk management process.
Describe the targets used by the organization to manage climate-related risks
and opportunities and performance against targets:
The Company uses EPC ratings of its properties to assess its progress towards
meeting and exceeding the MEES. In line with anticipated legislation, the
Company targets an EPC rating of C or better on all owned properties by 2028
and a rating of B or better by 2030.
The Company has defined 9 metrics, including asset EPC ratings, against which
it can measure progress towards its climate targets. These metrics, their
associated targets, and progress to date are shown in Table 3.
Table 3 | Climate-related metrics and targets
Target Metric Progress (as of June 2023)(50)
1 All supermarkets(51) B or above by 2030 EPC rating 25 of 50 (50%)
2 All supermarkets(51) C or above by 2028 EPC rating 42 of 50 (84%)
3 All ancillary units(52) B or above by 2030 EPC rating 37 of 107 (35%)
4 All ancillary units(52) C or above by 2028 EPC rating 99 of 107 (93%)
5 Five sites with Company-owned and managed car parks with electronic vehicle Number of vehicle charging stations 0 of 5 (0%)
charging
6 100% of Investment Adviser staff received training on climate risks and Percentage of staff trained In progress. Training for staff due in Q3 2023.
opportunities by end of 2023
7 Reduction in the Company's Scope 1 & 2 GHG emissions Absolute emissions Science-based target (SBT) currently being developed. SBT to be submitted by
the end of 2023.
8 Reduction in the Company's Scope 1 & 2 energy emissions (kgCO(2)e/m(2)) Emissions intensity Science-based target (SBT) currently being developed. SBT to be submitted by
the end of 2023.
9 Reduction in tenant energy emissions (kgCO(2)e/m(2)) Emissions intensity Science-based target (SBT) currently being developed.
Metrics and targets are not currently linked to remuneration policies for the
Investment Adviser or other personnel. This will be considered by the Company
over the next 12 months.
Disclose Scope 1, Scope 2 and, if appropriate, Scope 3 greenhouse gas (GHG)
emissions and the related risks:
The Company completed its first full Scope 1, 2 & 3 GHG inventory in 2023
based on FY 2023 (July 2022 - June 2023) data. The GHG inventory was
calculated following the GHG Protocol Guidance and all relevant scopes and
categories have been included. The Company defines its organisational boundary
using the operational control approach. This means that consumption relating
to areas where the Company has operational control, such as the communal areas
of certain sites, are included in its direct Scope 1 & 2 emissions.
Meanwhile, consumption relating to areas where the Company has limited
operational control, such as sites controlled by its tenants, are included in
its indirect Scope 3 emissions. Given that most of the Company's portfolio is
let on full repairing and insuring leases, Scope 3 forms the largest
proportion of its emissions at 99.7% of total Scope 1, 2 & 3 emissions,
largely due to tenants' energy use.
FY 2023 represented a normal year of business for the Company. FY 2023 is the
reporting period that will be used as the baseline year for the Company's
Science-based Target (SBT), which is currently in development. A target is due
to be submitted to the Science Based Targets initiative (SBTi) by the end of
2023.
Data Improvements
The FY 2023 GHG inventory improved upon the Company's initial measure of
tenant emissions in 2022, which were estimated due to a lack of activity data.
In 2023, the Investment Adviser worked with the Company's tenants to source
activity data to improve the accuracy of the emissions. This resulted in the
percentage of tenant emissions that were estimated reducing from 100% in 2022
to 86% in 2023. In 2023, the Company was also able to provide more data for
its direct emissions, such as the energy use in the communal areas of its
sites where the Company has operational control, and its operational Scope 3
emissions, which enabled the Company to compile a complete GHG inventory. The
details of this GHG inventory are provided in Table 4 (see Appendix B for
details of the methodology).
Table 4 | Greenhouse Gas Emissions
Scope and Category Description FY23 Emissions (tCO(2)e) FY22 Emissions (tCO(2)e)
Scope 1 Fuels used in the communal areas of sites where the Company as the landlord is 10 N/A
responsible for procuring the energy on behalf of the tenants.
Scope 2 (location-based) Electricity use in the communal areas of sites where the Company as the 101 N/A
landlord is responsible for procuring the energy on behalf of the tenants.
Scope 2 (market-based) 184 N/A
Total Scope 1 & 2 Emissions (market-based) 194 N/A
Scope 3 (1. Purchased Goods & Services) The Company's purchased goods and services, including emissions relating to 3,131 N/A
the Investment Adviser, Atrato Capital.
Scope 3 (2. Capital Goods) Embodied emissions of newly built properties added to the portfolio in the 463 N/A
reporting period.
Scope 3 (3. Fuel-and Energy-Related Activities) Upstream emissions of energy use included in Scope 1 & 2. 61 N/A
Scope 3 (13. Downstream Leased Assets) Scope 1 & 2 energy use of tenants, including fugitive emissions arising 77,273 87,715
from refrigeration and air conditioning.
Scope 1 & 2 energy use of communal areas where the Company is not
responsible for procuring the energy (included in FY23 only).
Total Scope 3 Emissions 80,929 87,715
Total Scope 1, 2 & 3 Emissions (market-based) 81,123 87,715
Out-of-scope Tenant emissions relating to biomass used to heat some tenant sites. 22 1,376
Table 5 | Energy Consumption
Energy Consumption FY23 FY22
Scope 1 & 2 Company (landlord) Energy Consumption (electricity and fuels) 574,047 N/A
(kWh)
Scope 3 Tenant Energy Consumption (electricity and fuels) (kWh) 186,704,059 224,504,601
Scope 3 Tenant Energy Consumption (refrigerant losses) (kg) 11,381 10,719
Table 6 | Intensity Metrics
Intensity Metric FY23 FY22
Scope 1 & 2 Company (landlord) Emissions Intensity (kgCO(2)e/ m(2)) 0.78 N/A
Scope 3 Tenant Energy Emissions Intensity (tCO(2)e/m(2)) 117.99 284
Scope 1 & 2 Company (landlord) Energy Intensity (kWh/m(2)) 2.30 N/A
Scope 3 Tenant Energy Intensity (electricity and fuels) (kWh/ m(2)) 473.86 715
Appendix A: Methodology notes for scenario analysis
Overview
The scenario analysis described in this report is underpinned by a standard,
recognised formula for risk:
Likelihood x Impact = Risk
This taxonomy is considered best practice and is informed by approaches taken
in major financial risk, climate risk and transitional planning frameworks.
This approach goes beyond many generic climate models which focus more on the
likelihood scores and ratings, by considering company specific inputs, as part
of impact scoring.
First Stage ratings are based on the Investment Adviser's initial judgement.
This considered previously performed risk assessment activities and secondary
research (including peer review). More formally defined materiality thresholds
will be defined in the next 12 months as a result of this inaugural 2023
scenario analysis process.
For scenario analysis ratings, the likelihood and impact are each scored on a
scale of 1-5 and are multiplied together to give a risk score between 1-25 for
each time horizon. An overall risk score (Overall Rating) is calculated for
all scenarios and time periods. Moderate-higher risk scores rate between
15-20, whilst higher risk scores rate between 21 and 25. The Overall Rating
and Impact gradings in Table 2 are based on the average across all sites
within the portfolio. The Likelihood grading in Table 2 is based on the
average across all time horizons under a given scenario and risk type.
Consideration is still made for moderate-higher and higher risk sites that are
outliers relative to the average value as explored in the accompanying text.
Inherent risks and the Company response will continue to be refined and
understood following this assessment.
A quantitative, value at risk or value of opportunity figure can be
subsequently assigned to the overall risk score in GBP (£), however this has
not been undertaken for the FY 2023 reporting. The corresponding costs of
managing the risks require further research and greater access to and
engagement with tenants. To publish only the value of inherent risks without
the associated costs of managing the risks, in the reasonable opinion of the
Company, was felt to present a reporting risk of misleading users of this
information, at this point in time. Therefore, research and engagement will be
performed over the next 12 months to progress this area of subsequent
analysis. This is considered to be a transitional challenge as the Company's
scenario analysis methodology is developed and embedded.
Likelihood
A 1-5 likelihood score is assigned to each location for each risk type. This
score represents the probability of the risk occurring in a given location and
is based on generic climate scenario data. Here likelihood scores are
calculated based on the IPPC Atlas (https://interactive-atlas.ipcc.ch/) and
Network for Greening the Financial System (NGFS) transition variables
available in the NGFS Scenarios Database (https://data.ene.iiasa.ac.at/ngfs/)
. A specific 'sub-data set' is assigned to each risk type to act as a proxy
for the likelihood of that risk occurring. The 'raw unit' values are converted
to a continuous score between 1-5 as described below.
Risk Type IPPC or NGFS sub-data set Raw Unit Justification
Policy and Legal Carbon Price (https://data.ene.iiasa.ac.at/ngfs) (NGFS) US$/tCO(2) The NGFS presents the shadow carbon price as a proxy for government policy
intensity. In reality, governments are pursuing a range of fiscal and
regulatory policies which have varying costs and benefits. Carbon price is
considered a good proxy to emerging regulation and is sensitive to the
country's level of ambition to mitigate climate change, timing of policy
implementation and distribution of policy measures across sectors.
Scores are relative to policy across other countries internationally.
Extreme heat CMIP6 - Days above 35ºC (IPCC Atlas (https://interactive-atlas.ipcc.ch/) ) ºC Days above 35ºC are judged to be extreme. While thresholds for Met Office
warnings and 'heat wave' definitions are variable across the UK, over 35
degrees Celsius appears to meet the historical thresholds required for a Met
Office 'heat wave' classification and amber or red weather warning being
issued.
Sites are scored relative to all other UK locations, with a 5 representing the
highest 20% of frequencies (over 3.2 or more days per year), and a 1
representing the lowest 20% of frequencies (fewer than 0.8 days per year).
Flooding WWF's Water Risk Filter (https://riskfilter.org/water/home) Bespoke WWF risk score number (1-6.6) This database specifically considers the physical flood risk indicator within
the tool. Scores are relative to all countries internationally. 'Optimistic
case' scores selected for RCP 2.6, 'Pessimistic case' for RCP 8.5 scenario.
Impact
Impact assesses the Company's current sensitivity or vulnerability to specific
risks and opportunities, based on current or historic company insight. Similar
to likelihood, a 1-5 score is assigned to each indicator, by a relevant
location (e.g. activity, customer, supplier etc.), for each Risk Type. There
are a number of considerations here.
· Impact Pathway: An 'impact pathway' is defined for each risk type. An
impact pathway is a financial statement line item (FSLI) that we would expect
to be materially affected by a risk type e.g. revenue, cost of sales,
operating costs, fixed assets, cash etc. A risk type may have multiple impact
pathways; however, the scope of this assessment considers only one impact
pathway. The impact pathway that is judged to be most significantly impacted
is selected. The impact pathways in focus were selected following consultation
with the Investment Adviser's finance team.
· Impact indicator: Multiple impact indicators can combine to give an
overall impact score and can be a combination of the Company's own data points
and secondary sources. There are no limits on the nature and extent of
indicators used; we have used one per risk type for the current year
reporting, however two, three or 10 could be used as the risk screening
evolves.
· Weighting: Each indicator used is combined to give an overall impact
score. The 'weight' each impact indicator carries is judgmental. At present,
because only one indicator has been used per risk, they all carry a weighting
of 100%, but should more indicators be added over time, the Company will
reflect on the weighting these carry and can adjust these within the Excel
model as they see fit.
· Financial materiality alignment: Where possible; we have aligned the
upper impact score (a '5 rating') with a financially material impact.
The below table details the impact scores and justifications for the Company's
impact ratings:
Risk Type Impact Indicator Impact banding Raw unit Justification
Policy and Legal EPC Certificate ratings per site - 100% weighting 5 EPC E As of June 2023, it is anticipated that Minimum Energy Efficiency Standards
(MEES) will require asset EPC ratings to be raised to C by 2028 and to B by
2030. This means that the landlord of any properties not meeting these
requirements could incur a fine (exemptions do apply - for example where there
is a tenant in situ who will not allow the landlord to make changes to improve
building energy performance). EPC ratings are an indicator of energy
efficiency, so as the UK transitions to Net Zero, higher energy intensity will
indicate a greater risk exposure.
The landlord of any asset currently at a E or below is more vulnerable to
incurring fines as a result of current regulation, as they are not compliant.
Given the direction of change, D or below would also be most vulnerable to any
other future regulation changes that may arise. Moderate-Higher and Higher
impact (bandings 4 & 5 respectively) assets may also harm the Company's
reputation and reduce the marketability of the individual asset.
While it is anticipated that an EPC C will not be judged as compliant in 2030,
the Company has judged this impact remains as a moderate risk due to the
following factors: there is felt to be sufficient time to upgrade to EPC B by
2030 and plans are already underway to achieve this, many of the Company's
tenants are on long-term leases, and so are less able and/or likely to
terminate or not renew lease if there were any MEES compliance issues. In
addition, the majority of the grocery tenants have clear plans they are
actioning in order to improve the energy performance of their store as this
leads to cost savings, as well as contributing towards their own
sustainability and Net Zero targets.
4 EPC D
3 EPC C
2 EPC B
1 EPC A
Extreme heat Energy Intensity per site (kWh/m(2) per year) - 100% weighting 5 859-706 This is a more specific indicator of energy use and is not related to
regulation like in the case of EPCs. In instances of extreme heat, it is
assumed that properties will consume more energy for cooling. Therefore, less
efficient or more energy intense assets are deemed more vulnerable as they are
likely already incurring higher than average energy costs. The higher energy
consumption will also be putting pressure on the specific tenant's Net Zero
targets and could indicate assets that are more vulnerable to that tenant not
renewing / applying pressure for the Company to improve these buildings.
The highest impact banding (5) represents the highest energy intensity 20% of
the range. The range is (859-92 = 767kWh/m(2)), therefore anything over 705
kWh/m(2) is assigned a 5.
This scores each site relative to each other - we cannot yet validate whether
the increase in cooling requirements at a more energy intense site is material
for the tenant; however, this will be explored in the future years SA.
4 705-552
3 551-399
2 398-245
1 244-92
Flooding Revenue per site - 100% weighting 5 >5% (>£4.4m) Annual rent collected (revenue) was used as an indicator for impact. The
rationale being that the greater the rent, the more material the impact if a
site was damaged by a flood, which resulted in a tenant defaulting/deferring
on lease payment.
Bandings are based on a % of total supermarket revenue where an individual
site generating over 5% of revenue is deemed financially material. Bandings
are not linear but logarithmic (50% of the banding above), in order to align
with the approach commonly applied in financial auditing.
4 >2.5% (>£2.2m)
3 >1.25% (>£1.1m)
2 >0.6% (>£0.5m)
1 <0.6% (<£0.5m)
Limitations of this analysis
- EPCs are only one means of assessing the overall energy efficiency
of a site and it may be the case that dynamic standards are introduced in the
near future.
- Two sites (Sainsbury's Denton & Sainsbury's Kettering) were
missing from the data and were assigned an impact value of 3 by default.
- Non-food assets were not screened in this analysis due to limited
data availability but will look to be included in next year's reporting
following a data remediation exercise.
Appendix B: Methodology notes for greenhouse gas inventory
Methodology and Assumptions
The 2022 Conversion Factors published by the UK Department for Energy Security
and Net Zero (DESNZ) and Department for Business, Energy, and Industrial
Strategy (BEIS) was the main source used for emission factors. All relevant
categories have been included and any exclusions are described below.
Scope 1 & 2
For electricity and natural gas, some actual consumption data was provided.
Where there were gaps, estimations were made using previous year data or floor
area intensities (based on similar sites within the portfolio) as proxies. For
fuel oil, spend was used as a proxy due to a lack of activity data.
Scope 3 (1. Purchased Goods & Services)
This category was estimated using spend as a proxy and applying Department for
Environment, Food & Rural Affairs (DEFRA) input-output factors
kgCO(2)/GBP) to expenditure.
Scope 3 (2. Capital Goods)
There were two sites where development was completed in the reporting period.
For these sites, embodied carbon emissions were estimated by applying a
benchmark intensity (kgCO(2)e/m(2)) to the floor area.
Scope 3 (13. Downstream Leased Assets)
The majority of emissions relate to tenant energy use. Some tenants provided
actual consumption data for electricity and heating. Where there were gaps,
estimations were made using benchmark intensity data based on floor area.
Refrigerants were estimated for all sites. One small non-food site was
excluded from the calculations due to a lack of activity data or floor area
required for estimations.
A smaller amount of emissions arise from the communal areas of sites where the
Company owns the land but is not responsible for paying for the energy. These
emissions were estimated using the floor area intensities of similar sites
with actual data.
OUR PRINCIPAL RISKS
The Board and JTC Global AIFM Solutions Limited, the Company's Alternative
Investment Fund Manager (the AIFM), together have joint overall responsibility
for the Company's risk management and internal controls, with the Audit
Committee reviewing the effectiveness of the Board's risk management processes
on its behalf.
To ensure that risks are recognised and appropriately managed, the Board has
agreed a formal risk management framework. This framework sets out the
mechanisms through which the Board identifies, evaluates and monitors its
principal risks and the effectiveness of the controls in place to mitigate
them.
The Board aims to operate in a low-risk environment, focusing substantially on
a single sector of the UK real estate market. The Board and the AIFM therefore
recognise that effective risk management is key to the Group's success. Risk
management ensures a defined approach to decision making that seeks to
decrease the uncertainty surrounding anticipated outcomes, balanced against
the objective of creating value for shareholders.
The Board determines the level of risk it will accept in achieving its
business objectives, and this has not changed during the year. We have no
appetite for risk in relation to regulatory compliance or the health, safety
and welfare of our tenants, service providers and the wider community in which
we work. We continue to have a moderate appetite for risk in relation to
activities which drive revenues and increase financial returns for our
investors.
There are a number of potential risks and uncertainties which could have a
material impact on the Group's performance over the forthcoming financial year
and could cause actual results to differ materially from expected and
historical results.
The risk management process includes the Board's identification, consideration
and assessment of those emerging risks which may impact the Group.
Emerging risks are specifically covered in the risk framework, with
assessments made both during the regular quarterly risk review and as
potentially significant risks arise. The quarterly assessment includes input
from the Investment Adviser and review of information by the AIFM, prior to
consideration by the Audit Committee.
The matrix below illustrates our assessment of the impact and the probability
of the principal risks identified. The rationale for the perceived increases
and decreases in the risks identified is contained in the commentary for each
risk category.
The following risks have been added in the current year and are discussed in
detail below:
· The default of one of the supermarket operators would create an excess
supply of supermarket real estate.
· Changes in regulatory policy could lead to our assets becoming
unlettable.
The Board considers these risks have increased since last year
1 The lower-than-expected performance of the Portfolio could reduce property
valuations and/or revenue, thereby affecting our ability to pay dividends or
lead to a breach of our banking covenants.
3 The default of one or more of our lessees would reduce revenue and may
affect our ability to pay dividends.
5 Our use of floating rate debt will expose the business to underlying
interest rate movements.
6 A lack of debt funding at appropriate rates may restrict our ability to
grow.
8 There can be no guarantee that we will achieve our investment objectives.
11 The assets within the Group's portfolio that are less energy efficient may
be exposed to downward pressure on valuation or increased pressure to invest
in the improvement of individual assets.
13 Volatile changes in the weather systems may deem the Group's properties no
longer viable to tenants.
15 Shareholders may not be able to realise their shares at a price above or
the same as they paid for the shares or at all.
16 Inflationary pressures on the valuation of the portfolio.
The Board considers these risks to be broadly unchanged since last year
2 Our ability to source assets may be affected by competition for investment
properties in the supermarket sector.
4 The default of one of the supermarket operators would create an excess
supply of supermarket real estate, thereby putting pressure on ERVs leading to
a breach in our banking covenants.
7 We must be able to operate within our banking covenants.
9 We are reliant on the continuance of the Investment Adviser.
10 We operate as a UK REIT and have a tax-efficient corporate structure, with
advantageous consequences for UK shareholders.
12 Changes in regulatory policy could lead to our assets becoming unlettable.
14 The rise in attempted cyber crime and more recently cyber risks arising
from recent geopolitical tensions has increased the risk for listed companies
being targets for market manipulation and/or insider trading.
17. Impact of war in Ukraine.
The Board considers these risks have decreased since last year
Property Risk
1. The lower-than-expected performance of the Portfolio could reduce
property valuations and/or revenue, thereby affecting our ability to pay
dividends or lead to a breach of our banking covenants
Probability: Impact: Mitigation
Moderate High (from Moderate) Our Portfolio is 99.6% let (100% of supermarket assets are let) with long
weighted average unexpired lease terms and an institutional-grade tenant base.
(from Low) An adverse change in our property valuations may lead to breach of our banking
covenants. Market conditions may also reduce the revenues we earn from our
property assets, which may affect our ability to pay dividends to
shareholders. A severe fall in values may result in us selling assets to repay All the leases contain upward-only rent reviews, 80% are inflation-linked, 18%
our loan commitments, resulting in a fall in our net asset value. are open market value and the rest contain fixed uplifts. These factors help
maintain our asset values.
We manage our activities to operate within our banking covenants and
constantly monitor our covenant headroom on loan to value and interest cover.
We are reviewing alternative financing arrangements to lessen any dependence
on the banking sector.
2. Our ability to source assets may be affected by competition for
investment properties in the supermarket sector
Probability: Impact: Mitigation
Low Moderate The Investment Adviser has extensive contacts in the sector and we often
benefit from off-market transactions. They also maintain close relationships
The Company faces competition from other property investors. Competitors may with a number of investors and agents in the sector, giving us the best
have greater financial resources than the Company and a greater ability to possible opportunity to secure future acquisitions for the Group.
borrow funds to acquire properties.
The Company has acquired assets which are anchored by supermarket properties
The supermarket investment market continues to be considered a safe asset but which also have ancillary retail on site, and these acquisitions allow the
class for investors seeking long-term secure cash flows which is maintaining Company to access quality supermarket assets whilst providing additional asset
competition for quality assets. This has led to increased demand for management opportunities.
supermarket assets without a comparable increase in supply, which could
potentially increase prices and make it more difficult to deploy capital.
We are not exclusively reliant on acquisitions to grow the Portfolio. Our
leases contain upward-only rent review clauses, which mean we can generate
additional income and value from the current Portfolio. We also have the
potential to add value through active asset management and we are actively
exploring opportunities for all our sites.
We maintain a disciplined approach to appraising and acquiring assets,
engaging in detailed due diligence and do not engage in bidding wars which
drive up prices in excess of underwriting.
3. The default of one or more of our lessees would reduce revenue and may
affect our ability to pay dividends
Probability: Impact: Mitigation
Moderate (from Low) High Our investment policy requires the Group to derive at least 60% of its rental
income from a Portfolio let to the largest four supermarket operators in the
Our focus on supermarket property means we directly rely on the performance of UK by market share. Focusing our investments on assets let to tenants with
UK supermarket operators. Insolvencies could affect our revenues earned and strong financial covenants and limiting exposure to smaller operators in the
property valuations. sector decreases the probability of a tenant default.
As at 30 June 2023, 76% of SUPR's income is from assets let to Sainsbury's and
Tesco who are deemed investment grade credit quality, with 2% of rental
exposure to Asda and 1% for Aldi. The portfolio however continues to be
geographically diversified with no individual tenant operating within more
than 10-15 minutes of one of the Group's assets in any single geographical
area.
Before investing, we undertake a thorough due diligence process with emphasis
on the strength of the underlying covenant and receive a recommendation on any
proposed investment from the AIFM.
Our investment strategy is to acquire strong trading grocery locations, which
in many cases have been supermarkets for between 30 and 50 years.
Our investment underwriting targets strong tenants with strong property
fundamentals (good location, large sites with low site cover) and which should
be attractive to other occupiers or have strong alternative use value should
the current occupier fail.
4. The default of one of the supermarket operators would create an excess
supply of supermarket real estate, thereby putting pressure on ERVs leading to
a breach in our banking covenants
Probability Impact Mitigation
High High The failure of a single operator in any given town would place strain on the
immediate surrounding retailers as demand previously supplied by the failed
A severe fall in values may result in us selling assets to repay our loan operator would be taken up by existing retailers.
commitments, resulting in a fall in our net asset value
The potential demise of a major supermarket operator would therefore result in
the real estate being potentially acquired by another operator and would
continue to be used as a supermarket.
Our investment strategy is to acquire strong trading grocery locations, which
in many cases have been supermarkets for between 30 and 50 years.
Our investment underwriting targets strong property fundamentals (good
location, large sites with low site cover) and which should be attractive to
other occupiers or have strong alternative use value should the current
occupier fail.
Financial Risk
5. Our use of floating rate debt will expose the business to underlying
interest rate movements as interest rates continue to rise
Probability: Impact: Mitigation
High (from Moderate) High (from Moderate) We have entered into interest rate swaps to partially mitigate our direct
exposure to movements in SONIA, by capping our exposure to SONIA increases.
Interest on the majority of our debt facilities is payable based on a margin
over SONIA. Any adverse movements in SONIA could significantly impair our We aim to hedge prudently our SONIA exposure, keeping the hedging strategy
profitability and ability to pay dividends to shareholders. under constant review in order to balance the risk of exposure to rate
movements against the cost of implementing hedging instruments.
We selectively utilise hedging instruments with a view to keeping the overall
exposure at an acceptable level.
As at the year end 100% of SUPR's drawn debt is fixed.
6. A lack of debt funding at appropriate rates may restrict our ability
to grow
Probability: Impact: Mitigation
Moderate (from Low) Moderate (from Low) The Board reviews the Group's financing arrangements and considers options for
refinancing well ahead of maturity.
The Board keeps our liquidity and gearing levels under review. We have
Impacts of both macroeconomic events and banks' exposure to offices in the US recently broadened our capital structure by starting to transition our balance
has resulted in many lenders reducing their exposure to real estate globally. sheet to an unsecured structure, reducing our reliance on a single source of
funding.
Supermarket property continues to remain popular with lenders, owing to long
Without sufficient debt funding we may be unable to pursue suitable investment leases and letting to single tenants with strong financial covenants and being
opportunities in line with our investment objectives. seen as a safe asset class in times of market uncertainty. We continue to see
appetite from both new and existing lenders to provide financing to SUPR which
has been demonstrated by the new facilities entered during and after the year
end.
The Company has had a cash liquidity event from the sale of the SRP which has
provided increased liquidity. We believe that this indicates that the Company
is not reliant in the short to medium-term on bank funding, however note the
recent refinancing events after the year end shows appetite from banks to lend
to SUPR.
7. We must be able to operate within our banking covenants
Probability: Impact: Mitigation
Low Moderate We and the AIFM continually monitor our banking covenant compliance to ensure
we have sufficient headroom and to give us early warning of any issues that
The Group's borrowing facilities contain certain financial covenants relating may arise.
to Loan to Value ratio and Interest Cover ratio, a breach of which would lead
to a default on the loan. The Group must continue to operate within these
financial covenants to avoid default.
We will enter into interest rate caps and swaps to mitigate the risk of
interest rate rises and also invest in assets let to institutional grade
covenants.
Corporate Risk
8. There can be no guarantee that we will achieve our investment
objectives
Probability: Impact: Mitigation
Moderate (from Low) Low The Board uses its expertise and experience to set our investment strategy and
it seeks external advice to underpin its decisions, for example independent
Our investment objectives include achieving the dividend and total returns asset valuations. There are complex controls and detailed due diligence
targets. The amount of any dividends paid or total return we achieve will arrangements in place around the acquisition of assets, designed to ensure
depend, among other things, on successfully pursuing our investment policy and that investments will produce the expected results.
the performance of our assets.
Significant changes to the Portfolio, both acquisitions and disposals, require
specific Board approval.
Future dividends are subject to the Board's discretion and will depend, on our The Investment Adviser's significant experience in the sector should continue
earnings, financial position, cash requirements, level and rate of borrowings, to provide us with access to assets that meet our investment criteria going
and available distributable reserves. forward.
Rental income from our current Portfolio, coupled with our hedging policy,
supports the current dividend target. Movement in capital value is subject to
market yield movements and the ability of the Investment Adviser to execute
asset management strategies
9. We are reliant on the continuance of the Investment Adviser.
Probability: Impact: Mitigation
Low Moderate A new Investment Advisory Agreement was entered into on 14 July 2021; this
revised agreement provides that unless there is a default, either party may
We rely on the Investment Adviser's services and reputation to execute our terminate by giving not less than two years written notice. This provides
investment strategy. Our performance will depend to some extent on the additional certainty for the Company. The Board keeps the performance of the
Investment Adviser's ability and the retention of its key staff. Investment Adviser under continual review and undertakes a formal review at
least annually.
The interests of the Company and the Investment Adviser are aligned due to (a)
key staff of the Investment Adviser having personal equity investments in the
Company and (b) any fees paid to the Investment Adviser in shares of the
Company are to be held for a minimum period of 12 months. The Board can pay up
to 25% of the Investment Adviser fee in shares of the Company.
In addition, the Board has set up a management engagement committee to assess
the performance of the Investment Adviser and ensure we maintain a positive
working relationship.
The AIFM receives and reviews regular reporting from the Investment Adviser
and reports to the Board on the Investment Adviser's performance. The AIFM
also reviews and makes recommendations to the Board on any investments or
significant asset management initiatives proposed by the Investment Adviser.
Taxation Risk
10. We operate as a UK REIT and have a tax-efficient corporate structure,
with advantageous consequences for UK shareholders. Any change to our tax
status or in UK tax legislation could affect our ability to achieve our
investment objectives and provide favourable returns to shareholders
Probability: Impact: Mitigation
Low Moderate The Board takes direct responsibility for ensuring we adhere to the UK REIT
regime by monitoring the REIT compliance. The Board has also engaged
If the Company fails to remain a REIT for UK tax purposes, our profits and third-party tax advisers to help monitor REIT compliance requirements and the
gains will be subject to UK corporation tax. AIFM also monitors compliance by the Company with the REIT regime.
Climate Risks
11. The assets within the Group's portfolio that are less energy efficient
may be exposed to downward pressure on valuation or increased pressure to
invest in the improvement of individual assets
Probability: Impact: Mitigation
Moderate (from Low) Moderate An ESG committee has been created to develop a road map for an energy
efficient property portfolio including an appropriate policy for minimum
As investors increase their focus on climate risk, there is likely to become a energy performance across the Group's assets.
larger pool of capital looking to invest in energy efficient assets.
Many of the supermarket operators have published targets to achieve Net Zero
Although this represents an opportunity for those best-in-class assets to and are actively upgrading stores to make them more energy efficient.
achieve a 'green premium', there is likely to be an impact on yield demanded,
and therefore valuation on assets within the portfolio which are less energy
efficient.
The Company continues to work with its tenants to help them meet this target
and has entered into a framework agreement with Atrato Onsite Energy plc to
install rooftop solar panels across SUPR's portfolio.
Given the unexpired lease terms across the portfolio, this trend may impact
the residual values implicit in valuations and reduce tenant demand for these
properties
We are conducting ongoing work to update our physical risk assessments on an
annual basis and integrate the outcomes of the analysis into our asset and
property management activities. Further detail has been included within the
TCFD report on pages 48 to 70.
Climate Risks
12. Changes in regulatory policy could lead to our assets becoming
unlettable
Probability: Impact: Mitigation
Moderate Moderate The ESG committee stays informed about changes in legislation by working
closely with the Investment Adviser and seeks input from specialist ESG
Changes in regulations (currently represented by Minimum Energy Efficiency experts where necessary.
Standards (MEES) could lead to the possibility of our assets becoming
unlettable. Any properties not compliant with MEES could attract reduced
tenant demand, reduced rental income and/or be subject to fines.
Proposed updates to MEES, together with updates on businesses to develop Net
Zero transition plans are being closely monitored.
Further detail has been included within the TCFD report on pages 48 to 70.
Climate Risks
13. Volatile changes in the weather systems may deem the Group's properties
no longer viable to tenants.
Probability: Impact: Mitigation
Moderate (from Low) Moderate The Company obtains environmental surveys on all acquisitions, which address
the short-term risk of climate related damage to group properties.
Given the impact of global warming, there is likely to be an increased risk of
floods and natural disasters which could result in physical damage to the
Group's properties.
Aspecialist ESG consultant was engaged during the year to understand the
Rising temperatures may also result in increased energy demand required for impacts of climate change on the portfolio, using scenario analysis. Work is
cooling, reducing tenant demand for less energy efficient buildings ongoing in this area, where further detail has been included within the TCFD
report on pages 48 to 70.
The Investment Adviser's asset management team continue to monitor the
changing physical risk as it develops through regular site visits to the
Group's assets.
Cyber Risks
14. The rise in attempted cyber crime and more recently cyber risks arising
from recent geopolitical tensions has increased the risk for listed companies
being targets for market manipulation and/or insider trading
Probability: Impact: Mitigation
Low Moderate The Company's main service provider is the Investment Adviser. The
Investment adviser's Cyber Security Policy reflects the NCSC's 10 steps to
Given the increase in remote and hybrid working, this greater reliance on Cyber Security guidance. Robust network security measures have been
technology has resulted in organisations becoming more vulnerable to cyber implemented, including real time system oversight, combined with offsite data
threats and online hacking. back-up and access controls based on the principle of least privilege. The
Investment Adviser frequently reviews its cyber security arrangements,
alongside business continuity plans to address a major disruption to the
organisation. Members of the Investment Adviser team receive regular training
As an externally managed REIT, all services are contracted with external third on cyber security issues.
party service providers. A cyber attack on any of the Group's third party
service providers could lead to wider business disruption or loss of market
sensitive information.
When onboarding other service providers, the Investment Adviser undertakes
detailed background checks including a review of data security when relevant.
Additional due diligence is undertaken where access to the Investment
Adviser's systems is required, with enhanced controls implemented, again based
on the principle of least privilege.
Market Price Risk
15. Shareholders may not be able to realise their shares at a price above or
the same as they paid for the shares or at all
Probability: Impact: Mitigation
High Moderate The Company may seek to address any significant discount to NTA at which its
ordinary shares may be trading by purchasing its own ordinary shares in the
(from Moderate) market on an ad hoc basis. The Directors have the authority to make market
purchases of up to 14.99 per cent of the ordinary shares in issue as at IPO;
The Company's ordinary shares have this year traded in a wider range to the being 1.20% of the total shares in issue as at 30 June 2023.
price at which they were issued than they have in previous years. This is
largely a function of supply and demand for the ordinary shares in the market
and cannot therefore be controlled by the Board. The Company's move to the
premium list of the London Stock Exchange increased liquidity in shares, Ordinary shares will be repurchased only at prices below the prevailing NAV
thereby reducing the risk that shareholders will not be able to sell their per ordinary share, which should have the effect of increasing the NAV per
shares at all. ordinary share for remaining shareholders. It is intended that a renewal of
the authority to make market purchases will be sought from shareholders at
each Annual General Meeting of the Company.
Purchases of Ordinary Shares will be made within guidelines established from
time to time by the Board.
Investors should note that the repurchase of ordinary shares is entirely at
the discretion of the Board and no expectation or reliance should be placed on
such discretion being exercised on any one or more occasions or as to the
proportion of ordinary shares that may be repurchased.
The recent sale proceeds from the SRP investment has optionality to be used
for this purpose.
Cyber Risks
14. The rise in attempted cyber crime and more recently cyber risks arising
from recent geopolitical tensions has increased the risk for listed companies
being targets for market manipulation and/or insider trading
Probability: Impact: Mitigation
Low Moderate The Company's main service provider is the Investment Adviser. The
Investment adviser's Cyber Security Policy reflects the NCSC's 10 steps to
Given the increase in remote and hybrid working, this greater reliance on Cyber Security guidance. Robust network security measures have been
technology has resulted in organisations becoming more vulnerable to cyber implemented, including real time system oversight, combined with offsite data
threats and online hacking. back-up and access controls based on the principle of least privilege. The
Investment Adviser frequently reviews its cyber security arrangements,
alongside business continuity plans to address a major disruption to the
organisation. Members of the Investment Adviser team receive regular training
As an externally managed REIT, all services are contracted with external third on cyber security issues.
party service providers. A cyber attack on any of the Group's third party
service providers could lead to wider business disruption or loss of market
sensitive information.
When onboarding other service providers, the Investment Adviser undertakes
detailed background checks including a review of data security when relevant.
Additional due diligence is undertaken where access to the Investment
Adviser's systems is required, with enhanced controls implemented, again based
on the principle of least privilege.
Market Price Risk
15. Shareholders may not be able to realise their shares at a price above or
the same as they paid for the shares or at all
Probability:
Impact:
Mitigation
High
(from Moderate)
Moderate
The Company's ordinary shares have this year traded in a wider range to the
price at which they were issued than they have in previous years. This is
largely a function of supply and demand for the ordinary shares in the market
and cannot therefore be controlled by the Board. The Company's move to the
premium list of the London Stock Exchange increased liquidity in shares,
thereby reducing the risk that shareholders will not be able to sell their
shares at all.
The Company may seek to address any significant discount to NTA at which its
ordinary shares may be trading by purchasing its own ordinary shares in the
market on an ad hoc basis. The Directors have the authority to make market
purchases of up to 14.99 per cent of the ordinary shares in issue as at IPO;
being 1.20% of the total shares in issue as at 30 June 2023.
Ordinary shares will be repurchased only at prices below the prevailing NAV
per ordinary share, which should have the effect of increasing the NAV per
ordinary share for remaining shareholders. It is intended that a renewal of
the authority to make market purchases will be sought from shareholders at
each Annual General Meeting of the Company.
Purchases of Ordinary Shares will be made within guidelines established from
time to time by the Board.
Investors should note that the repurchase of ordinary shares is entirely at
the discretion of the Board and no expectation or reliance should be placed on
such discretion being exercised on any one or more occasions or as to the
proportion of ordinary shares that may be repurchased.
The recent sale proceeds from the SRP investment has optionality to be used
for this purpose.
Macroeconomic Risks
16. Inflationary pressures on the valuation of the portfolio
Probability: Impact: Mitigation
High (from Low) Moderate Inflation is monitored closely by the Investment Adviser. The Group's
portfolio rent reviews include a mixture of fixed, upward only capped as well
The UK is experiencing historic price rises with the highest inflation rate in as open market rent reviews, to hedge against a variety of inflationary
40 years, and a slowing economy. The Bank of England has responded by outcomes.
successive interest rate increases which could lead to a sharp decline in
economic activity, stock markets and possibly stagflation. A recessionary
environment could impact real estate valuations.
Continued high inflation may cause rents to exceed market levels and result in
the softening of valuation yields. Where leases have capped rental uplifts,
high inflation may cause rent reviews to cap out at maximum values, causing
rental uplifts to fall behind inflation.
Macroeconomic Risks
17. Impact on the war in Ukraine
Probability: Impact: Mitigation
Low Moderate Supermarket operators have historically been able to successfully pass on
inflationary increases through increasing price increases to the end consumer.
Russia's invasion of the Ukraine in February 2022 has led to a surge in global
energy and food prices. The extent and impact of military action, resulting
sanctions and further market disruptions is difficult to predict which
increases the uncertainty, and challenges of tenant operators as well as Whilst sales volumes may fall in a recessionary environment, the nature of
consumer confidence and financial markets. food means that demand is relatively inelastic, where the end consumer may
decide to substitute luxury brands for supermarket own-branded products.
This could lead to a recession should the conflict move towards a global one.
Our tenants have strong balance sheets with robust and diversified supply
chains. The tenants are therefore well positioned to deal with any disruption
that may occur. As a result, we believe any adverse impact for the Group would
be minimal.
The Group invests solely in UK properties.
Going concern
In light of the current macroeconomic backdrop, the Directors have placed a
particular focus on the appropriateness of adopting the going concern basis in
preparing the Group's and Company's financial statements for the year ended 30
June 2023. In assessing the going concern basis of accounting the Directors
have had regard to the guidance issued by the Financial Reporting Council.
Liquidity
At 30 June 2023, the Group generated net cash flow from operating activities
of £84.3 million, held cash of £37.5 million and undrawn committed
facilities totalling £189.9 million with no capital commitments or contingent
liabilities.
From the sale of its interest in the Sainsburys Reversion Portfolio (SRP), the
Group received proceeds of £135.1 million post year end. £97.1 million of
this was used for working capital and debt repayment and £38.0 million
towards acquiring two stores (including acquisition costs). As at the date of
signing the annual report the Gross LTV of the group was 34.0%. The remainder
of the receivable of £1.5 million is conditional on the sale of the remaining
store in the SRP.
After the year end, the Group also reduced its debt capacity from £862.1
million to £689.5 million (see Note 20 for more information), leaving undrawn
committed facilities of over £100 million available.
The Directors are of the belief that the Group continues to be well funded
during the going concern period with no concerns over its liquidity.
Refinancing events
At the date of signing the financial statements, the Deka facility falls due
for repayment during the going concern period (August 2024). It is intended
that the facility will be refinanced prior to maturity, or if required, it
will be paid down in full using the Group's available undrawn committed
facilities of over £100 million. All lenders have been supportive during the
year and have expressed commitment to the long-term relationship they wish to
build with the Company.
Covenants
The Group's debt facilities include covenants in respect of LTV and interest
cover, both projected and historic. All debt facilities, except for the
unsecured facilities, are ring-fenced with each specific lender.
The Directors have evaluated a number of scenarios as part of the Group's
going concern assessment and considered the impact of these scenarios on the
Group's continued compliance with secured debt covenants. The key assumptions
that have been sensitised within these scenarios are falls in rental income
and increases in administrative cost inflation.
As at the date of this consolidated financial information, 100% of contractual
rent for the period has been collected. The Group benefits from a secure
income stream from its property assets that are let to tenants with excellent
covenant strength under long leases that are subject to upward only rent
reviews.
The list of scenarios are below and are all on top of the base case model
which includes prudent assumptions on valuations and cost inflation. No
sensitivity for movements in interest rates have been modelled as the Group
has fixed its interest cost through the use of interest rate derivatives
throughout the going concern assessment period.
Scenario Rental Income Costs
Base case scenario (Scenario 1) 100% contractual rent received when due and rent reviews based on forward Investment adviser fee based on terms of the signed agreement (percentage of
looking inflation curve, capped at the contractual rate of the individual NAV as per note 27), other costs 0.35% of NAV.
leases.
Scenario 2 Rental income to fall by 25% Costs expected to remain the same as the base case.
Scenario 3 Rental Income expected to remain the same as the base case. 10% increases on base case costs to all administrative expenses
The Group continues to maintain covenant compliance for its LTV and ICR
thresholds throughout the going concern assessment period under each of the
scenarios modelled. One of the secured facilities in the Group has a debt
yield covenant, which is calculated as the passing rent divided by the loan
balance for the properties secured against the lender. The debt yield covenant
only would be breached for this facility if rental income is reduced by 6%
during the going concern assessment period. The Board considers this scenario
highly unlikely given the underlying covenant strength of the tenants.
Furthermore, there are remedies available at the Group's disposal which
includes reducing a portion of the outstanding debt from available undrawn
facilities or providing additional security over properties that are currently
unencumbered. The lowest amount of ICR headroom experienced in the
worst-case stress scenarios was 22%. Based on the latest bank commissioned
valuations, Property values would have to fall by more than 21% before LTV
covenants are breached, and 10% against 30 June 2023 Company valuations.
Similarly, the strictest interest cover covenant within each of the
ring-fenced banking groups is 225%, where the portfolio is forecast to have an
average interest cover ratio of 572% during the going concern period.
Having reviewed and considered three modelled scenarios, the Directors
consider that the Group has adequate resources in place for at least 12 months
from the date of these results and have therefore adopted the going concern
basis of accounting in preparing the Annual Report.
Assessment of viability
The period over which the Directors consider it feasible and appropriate to
report on the Group's viability is the five-year period to 30 June 2028. This
period has been selected because it is the period that is used for the Group's
medium-term business plans and individual asset performance forecasts. The
assumptions underpinning these forecast cash flows and covenant compliance
forecasts were sensitised to explore the resilience of the Group to the
potential impact of the Group's significant risks, or a combination of those
risks. The principal risks on pages 71 to 84 summarise those matters that
could prevent the Group from delivering on its strategy. A number of these
principal risks, because of their nature or potential impact, could also
threaten the Group's ability to continue in business in its current form if
they were to occur. The Directors paid particular attention to the risk of a
deterioration in economic outlook which could impact property fundamentals,
including investor and occupier demand which would have a negative impact on
valuations, and give rise to a reduction in the availability of finance.
The sensitivities performed were designed to be severe but plausible; and to
take full account of the availability of mitigating actions that could be
taken to avoid or reduce the impact or occurrence of the underlying risks.
Viability Statement
The Board has assessed the prospects of the Group over the five years from the
balance sheet date to 30 June 2028, which is the period covered by the Group's
longer-term financial projections. The Board considers five years to be an
appropriate forecast period since, although the Group's contractual income
extends beyond five years, the availability of most finance and market
uncertainty reduces the overall reliability of forecast performance over a
longer period.
The Board considers the resilience of projected liquidity, as well as
compliance with secured debt covenants and UK REIT rules, under a range of RPI
and property valuation assumptions.
The principal risks and the key assumptions that were relevant to this
assessment are as follows:
Risk Assumption
Borrowing risk The Group continues to comply with all relevant loan covenants. The Group is
able to refinance all debt falling due within the viability assessment period
on acceptable terms.
Interest Rate Risk The increase in variable interest rates are managed by reduction of variable
debt from cash inflows and utilising interest rate derivatives to limit the
exposure to variable debt.
Liquidity risk The Group continues to generate sufficient cash to cover its costs while
retaining the ability to make distributions.
Tenant risk Tenants (or guarantors where relevant) comply with their rental obligations
over the term of their leases and no key tenant suffers an insolvency event
over the term of the review.
Based on the work performed, the Board has a reasonable expectation that the
Group will be able to continue in business over the five-year period of its
assessment.
Other disclosures
Disclosures in relation to the Company's business model and strategy have been
included within the Investment Adviser's Interview on pages 18 to 29.
Disclosures in relation to the main industry trends and factors that are
likely to affect the future performance and position of the business have been
included within The UK Grocery Market on pages 34 to 38. Disclosures in
relation to environmental and social issues have been included within the TCFD
Report on pages 48 to 70. Employee diversity disclosures have not been
included as the Directors do not consider these to be relevant to the Company.
Key Performance Indicators (KPIs)
The KPIs and EPRA performance measures used by the Group in assessing its
strategic progress have been included on pages 39 to 42.
Nick Hewson
Chair
19 September 2023
SECTION 172(1) STATEMENT
The Directors consider that in conducting the business of the Company over the
course of the year ended 30 June 2023, they have acted to promote the
long-term success of the Company for the benefit of shareholders, whilst
having regard to the matters set out in section 172(1)(a-f) of the Companies
Act 2006 (the "Act").
Details of our key stakeholders and how the Board engages with them can be
found on pages 87 to 91. Further details of the Board activities and principal
decisions are set out on pages 105 to 107 providing insight into how the Board
makes decisions and their link to strategy.
Other disclosures relating to our consideration of the matters set out in
s172(1)(a-f) of the Act have been noted as follows:
s.172 Factor Our approach Relevant disclosures
A. The likely consequences of any decision in the long-term The Board has regard to its wider obligations under Section 172 of the Act. As Key decisions of the Board during the year on page 107.
such strategic discussions involve careful considerations of the longer-term
consequences of any decisions and their implications on shareholders and other Our Key Stakeholder Relationships on pages 87 to 91.
stakeholders and the risk to the longer-term success of the business. Any
recommendation is supported by detailed cash flow projections based on various Board Activities during the year on pages 105 and 106.
scenarios, which include: availability of funding; borrowing; as well as the
wider economic conditions and market performance.
B. The interests of the Company's employees The Group does not have any employees as a result of its external management Our Key Stakeholder Relationships on pages 87 to 91.
structure.
The Board's main working relationship is with the Investment Adviser.
Consequently, the Directors have regard to the interests of the individuals Culture on page 102.
who are responsible for delivery of the investment advisory services to the
Company to the extent that they are able to do so.
C. The need to foster the Company's business relationships with suppliers, The Company's key service providers and customers include the Investment Our Key Stakeholder Relationships on pages 87 to 92.
customers and others Adviser, professional firms such as lenders, property agents, accounting and
law firms, tenants with which we have longstanding relationships and
transaction counterparties which are generally large and sophisticated
businesses or institutions.
D. The impact of the Company's operations on the community and the environment As an owner of assets located in communities across the UK, we aim to ensure Our Key Stakeholder Relationships on pages 87 to 92.
that our buildings and their surroundings provide safe and comfortable
environments for all users.
The Board and the Investment Adviser have committed to limiting the impact of Details of the ESG policy and strategy are included on pages 48 to 70.
the business on the environment where possible and engage with tenants to seek
to improve the ESG credentials of the properties owned by the Company. The Board's approach to sustainability is also explained in the Company's
first standalone sustainability report available on the Company website.
E. The desirability of the Company maintaining a reputation for high standards The Board is mindful that the ability of the Company to continue to conduct Chair's Letter on Corporate Governance on pages 92 and 93.
of business conduct its investment business and to finance its activities depends in part on the
reputation of the Board, the Investment Adviser and Investment Advisory Team. Our Principal Risks and Uncertainties on pages 71 to 84.
The risk of falling short of the high standards expected and thereby risking Our Culture on page 102.
business reputation is included in the Audit and Risk Committee's review of
the Company's risk register, which is conducted at least annually.
F. The need to act fairly as between members of the Company The Board recognises the importance of treating all members fairly and Chair's Letter on Corporate Governance on pages 92 and 93.
oversees investor relations initiatives to ensure that views and opinions of
shareholders can be considered when setting strategy. Our Key Stakeholder Relationships on pages 87 to 91.
DIRECTORS' REPORT
The Directors present their report together with the audited financial
information for the year ended 30 June 2023. The Corporate Governance
Statement pages 108 to 112 forms part of this report.
Principal activities and status
The Company is registered as a UK public limited company under the Companies
Act 2006. It is an Investment Company as defined by Section 833 of the
Companies Act 2006 and has been established as a closed-ended investment
company with an indefinite life. The Company has a single class of shares in
issue which were traded during the year on the Premium List of the London
Stock Exchange's Main Market. The Group has entered the Real Estate Investment
Trust regime for the purposes of UK taxation.
The Company is a member of the Association of Investment Companies (the
AIC).
Results and dividends
The results for the year are set out in the attached financial information. It
is the policy of the Board to declare and pay dividends as quarterly interim
dividends.
In respect of the 30 June 2023 financial year, the Company has declared the
following interim dividends amounting to 6.00 pence per share (2022: 5.94
pence per share).
Relevant Period Dividend per share (pence) Ex-dividend date Record date Date paid
Quarter ended 1.50 6 October 2022 7 October 2022 16 November 2022
30 September 2022
Quarter ended 1.50 19 January 2023 20 January 2023 23 February 2023
31 December 2022
Quarter ended 1.50 20 April 2023 21 April 2023 26 May 2023
31 March 2023
Quarter ended 1.50 13 July 2023 14 July 2023 4 August 2023
30 June 2023
Dividend policy
Subject to market conditions and performance, financial position and outlook,
it is the Directors' intention to pay an attractive level of dividend income
to shareholders on a quarterly basis. The Company intends to grow the dividend
progressively through investment in supermarket properties with upward-only,
predominantly inflation-protected, long-term lease agreements.
Directors
The names of the Directors who served from in the year ended 30 June 2023 are
set out in the Board of Directors section on pages 94 to 96 together with
their biographical details and principal external appointments.
Powers of Directors
The Board will manage the Company's business and may exercise all the
Company's powers, subject to the Articles, the Companies Act and in certain
circumstances, are subject to the authority being given to the Directors by
shareholders in general meeting.
The Board's role is to provide entrepreneurial leadership of the Company
within a framework of prudent and effective controls which enables risk to be
assessed and managed. It also sets up the Group's strategic aims, ensuring
that the necessary resources are in place for the Group to meet its objectives
and review investment performance. The Board also sets the Group's values,
standards and culture. Further details on the Board's role can be found in the
Corporate Governance Report on pages 100 to 104.
Appointment and replacement of Directors
All Directors were elected or re-elected at the AGM on 17 November 2022, with
the exception of Sapna Shah who was appointed to the Board on 1 March 2023. In
accordance with the AIC Corporate Governance Code, all the Directors will
retire and those who wish to continue to serve will offer themselves for
election or re-election at the forthcoming Annual General Meeting.
Directors' indemnity
The Company maintains £30 million of Directors' and Officers' Liability
Insurance cover for the benefit of the Directors, which was in place
throughout the year. The level of cover was increased to £35 million on 17
July 2023 and continues in effect at the date of this report.
Significant shareholdings
The table below shows the interests in shares notified to the Company in
accordance with Chapter 5 of the Disclosure Guidance and Transparency Rules
issued by the Financial Conduct Authority who have a disclosable interest of
3% or more in the ordinary shares of the Company as at 30 June 2023.
Percentage of issued share capital
Number of shares
Blackrock Inc. 68,196,517 5.46%
Schroders Plc 63,131,941 5.08%
Quilter Plc 62,058,617 4.99%
Ameriprise Financial, Inc. 61,728,272 4.98%
Waverton Investment Management Limited 46,422,935 3.79%
Since the year end, and up to 19 September 2023, the Company has not received
any further notifications of changes of interest in its ordinary shares in
accordance with DTR 5. The information provided is correct as at the date of
notification.
Donations and contributions
The Group made no political or charitable donations during the year (2022:
none).
Branches outside the UK
The Company has no branches outside the UK.
Financial risk management
The Group's exposure to, and management of, capital risk, market risk and
liquidity risk is set out in note 21 to the Group's financial information.
Amendments to the Articles
The Articles may only be amended with shareholders' approval in accordance
with the relevant legislation.
Employees
The Group has no employees and therefore no employee share scheme or policies
for the employment of disabled persons or employee engagement.
Anti-bribery policy
The Company has a zero-tolerance policy towards bribery and is committed to
carrying out its business fairly, honestly and openly. The anti-bribery
policies and procedures apply to all its Directors and to those who represent
the Company.
Human Rights
The Company has a zero-tolerance approach to modern slavery and human
trafficking and is committed to ensuring its organisation and business
partners operate with the same values. The Company's modern slavery and human
trafficking statement can be found on the Company's website.
Research and development
No expenditure on research and development was made during the period.
Related party transactions
Related party transactions for the year ended 30 June 2023 can be found in
note 27 of the financial information.
Annual General Meeting
The Annual General Meeting of the Company will be held on 7 December 2023.
Greenhouse gas emissions
As a listed entity, the Company is required to comply with the Streamlined
Energy and Carbon Reporting (SECR) regulations under the Companies (Directors'
Report) and Limited Liability Partnerships (Energy and Carbon Report)
Regulations 2018. Information regarding emissions arising from the Group's
activities are included within the TCFD aligned report on pages 48 to 70.
Disclosure of information to auditor
All of the Directors have taken all the steps that they ought to have taken to
make themselves aware of any information needed by the auditor for the
purposes of their audit and to establish that the auditor is aware of that
information. The Directors are not aware of any relevant audit information of
which the auditor is unaware.
Significant agreements
The Company entered into a new unsecured borrowing facility on 1 July 2022
provided by a syndicate of lenders. The facility includes provisions that may
require any outstanding borrowings to be repaid or the alteration or
termination of the facilities in the event of a change of control at the
ultimate parent company level.
There are no agreements with the Company or a subsidiary in which a Director
is or was materially interest or to which a controlling shareholder was party.
Share capital structure
As at 30 June 2023, the Company's issued share capital consisted of
1,246,239,185 ordinary shares of one penny each, all fully paid and listed on
the Premium List of the London Stock Exchange's Main Market. Further details
of the share capital, including changes throughout the year are summarised in
note 22 of the financial information.
Subject to authorisation by Shareholder resolution, the Company may purchase
its own shares in accordance with the Companies Act 2006. At the Annual
General Meeting held in 2022, shareholders authorised the Company to make
market purchases of up to 186,140,810 Ordinary Shares. The Company has not
repurchased any of its ordinary shares under this authority, which is due to
expire at the AGM in 2023 and appropriate renewals will be sought.
There are no restrictions on transfer or limitations on the holding of the
ordinary shares. None of the shares carry any special rights with regard to
the control of the Company. There are no known arrangements under which
financial rights are held by a person other than the holder of the shares and
no known agreements on restrictions on share transfers and voting rights.
Post balance sheet events
For details of events since the year end date, please refer to note 28 of the
consolidated information.
Corporate Governance
The Company's statement on corporate governance can be found in the Corporate
Governance Report on pages 108 to 112 of this Annual Report. The Corporate
Governance Report forms part of this directors' report and is incorporated
into it by cross-reference.
Information included in the strategic report
The information that fulfils the reporting requirements relating to the
following matters can be found on the pages identified.
Subject matter Page reference
Likely future developments 18 to 29
Signed by order of the Board on 19 September 2023
Nick Hewson
Chair
19 September 2023
ALTERNATIVE INVESTMENT FUND MANAGER'S REPORT
Background
The Alternative Investment Fund Managers Directive (the AIFMD) came into force
on 22 July 2013. The objective of the AIFMD was to ensure a common regulatory
regime for funds marketed in or into the EU which are not regulated under the
UCITS regime. This was primarily for investors' protection and also to enable
European regulators to obtain adequate information in relation to funds being
marketed in or into the EU to assist their monitoring and control of systemic
risk issues.
The AIFM is a non-EU Alternative Investment Fund Manager (a "Non-EU AIFM"),
the Company is a non-EU Alternative Investment Fund (a "Non-EU AIF") and the
Company is marketed primarily into the UK, but also into the EEA. Although the
AIFM is a non-EU AIFM, so the depositary rules in Article 21 of the AIFMD do
not apply, the transparency requirements of Articles 22 (Annual report) and 23
(Disclosure to investors) of the AIFMD do apply to the AIFM and therefore to
the Company. In compliance with those articles, the following information is
provided to the Company's shareholders by the AIFM.
1. Material Changes in the Disclosures to Investors
During the financial year under review, there were no material changes to the
information required to be made available to investors before they invest in
the Company under Article 23 of the AIFMD from that information set out in the
Company's prospectus dated 1 October, 2021, save as updated in the
supplementary prospectus dated 7 April, 2022, as disclosed below and in
certain sections of the Strategic Report, those being the Chair's Statement,
Investment Adviser's Interview, The UK Grocery Market, TCFD Compliant Report,
Our Principal Risks and the Section 172(1) Statement, together with the
Corporate Governance Reports in this annual financial report.
2. Risks and Risk Management Policy
The current principal risks facing the Company and the main features of the
risk management systems employed by AIFM and the Company to manage those risks
are set out in the Strategic Report (Our Principal Risks), the Audit and Risk
Committee Report and in the Directors' Report.
3. Leverage and borrowing
The Company is entitled to employ leverage in accordance with its investment
policy and as described in the Chair's Statement, the sections entitled
"Financial Highlights" and "Financial Overview" in the Strategic Report and in
the notes to the financial information. Other than as disclosed therein, there
were no changes in the Company's borrowing powers and policies.
4. Environmental, Social and Governance (ESG) Issues and Regulation (EU)
2019/2099 on Sustainability-Related Disclosures in the Financial Services
Sector (the "SFDR")
As a member of the JTC group of Companies, the AIFM's ultimate beneficial
owner and controlling party is JTC Plc, a Jersey-incorporated company whose
shares have been admitted to the Official List of the UK's Financial Conduct
Authority and to trading on the London Stock Exchange's Main Market for Listed
Securities (mnemonic JTC LN, LEI 213800DVUG4KLF2ASK33). In the conduct of its
own affairs, the AIFM is committed to best practice in relation to ESG matters
and has therefore adopted JTC Plc's ESG framework, which can be viewed online
at https://www.jtcgroup.com/esg/. JTC Plc's sustainability report can also be
viewed online at https://www
(https://www.jtcgroup.com/investor-relations/annual-review/)
.jtcgroup.com/investor-relations/annual-review/
(https://www.jtcgroup.com/investor-relations/annual-review/) .
As at the date of this report, JTC Plc is a signatory of the U.N. Principles
for Responsible Investment. The JTC group is also carbon neutral and works to
support the achievement of ten of the U.N.'s Sustainable Development Goals.
JTC Plc reports under TCFD and under the SASB framework.
From the perspective of the SFDR, although the AIFM is a non-EU AIFM, the
Company is marketed into the EEA, so that the AIFM is required to comply with
the SFDR in so far as it applies to the Company and the AIFM's management of
the Company, which the Company has classified as being within the scope of
Article 6 of the SFDR.
The AIFM and Atrato Capital Limited ("Atrato") as the Company's Alternative
Investment Fund Manager and Investment Adviser respectively do consider ESG
matters in their respective capacities, as explained in SUPR's prospectus
dated 1 October, 2021, as updated by SUPR's supplementary prospectus dated 7
April, 2022. Copies of both of those documents can be viewed on the AIFM's
website at
https://jtcglobalaifmsolutions.com/clients/supermarket-income-reit-plc/
(https://jtcglobalaifmsolutions.com/clients/supermarket-income-reit-plc/) .
Since the publication of those documents, the AIFM, Atrato and the Company
have continued to enhance their collective approach to ESG matters and
detailed reporting on (a) enhancements made to each party's policies,
procedures and operational practices and (b) our collective future intentions
and aspirations is included in the TCFD Compliant Report included in the
Strategic Report and the ESG Committee Report in this annual financial report.
The Company is also publishing a separate Sustainability Report on its
website.
The AIFM also has a comprehensive risk matrix (the "Matrix"), which is used to
identify, monitor and manage material risks to which the Company is exposed,
including ESG and sustainability risks, the latter being an environmental,
social or governance event or condition that, if it occurred, could cause an
actual or a potential material negative impact on the value of an investment.
We also consider sustainability factors, those being environmental, social
and employee matters, respect for human rights, anti-corruption and
anti-bribery matters.
The AIFM is cognisant of the announcement published by H.M. Treasury in the UK
of its intention to make mandatory by 2025 disclosures aligned with the
recommendations of the Task Force on Climate-related Financial Disclosures,
with a significant proportion of disclosures mandatory by 2023. The AIFM also
notes the roadmap and interim report of the UK's Joint Government-Regulator
TCFD Taskforce published by H.M. Treasury on 9 November, 2020. The AIFM
continues to monitor developments and intends to comply with the UK's regime
to the extent either mandatory or desirable as a matter of best practice.
5. Remuneration of the AIFM's Directors and Employees
During the financial year under review, no separate remuneration was paid by
the AIFM to two of its executive directors, Graham Taylor and Kobus Cronje,
because they were both employees of the JTC group of companies, of which the
AIFM forms part. The third executive director, Matthew Tostevin, is paid a
fixed fee of £10,000 for acting as a director. Mr Tostevin is paid additional
remuneration on a time spent basis for services rendered to the AIFM and its
clients. Other than the directors, the AIFM has no employees. The Company
has no agreement to pay any carried interest to the AIFM. During the year
under review, the AIFM paid £10,000 in fixed fees and £43,478.75 in variable
remuneration to Mr Tostevin.
6. Remuneration of the AIFM Payable by the Company
The AIFM was during the year under review paid a fee of 0.04% per annum of the
net asset value of the Company up to £1 billion and 0.03% of the Company's
net asset value in excess of £1 billion, subject to a minimum of £50,000 per
annum, such fee being payable quarterly in arrears. The total fees paid to the
AIFM during the year under review were £480,763.62.
JTC Global AIFM Solutions Limited
Alternative Investment Fund Manager
19 September 2023
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended 30 June 2023
Notes Year to Year to
30 June 2023 £'000 30 June 2022
£'000
Gross rental income 3 95,823 72,363
Service charge income 3 5,939 2,086
Service charge expense 4 (6,518) (2,338)
Net Rental Income 95,244 72,111
Administrative and other expenses 5 (15,429) (13,937)
Operating profit before changes in fair value of investment properties and 79,815 58,174
share of income and profit on disposal from joint venture
Changes in fair value of investment properties 12 (256,066) 21,820
Total changes in fair value of investment properties (256,066) 21,820
Share of income from joint venture 14 23,232 43,301
Profit on disposal of joint venture 14 19,940 -
Operating (loss)/profit (133,079) 123,295
Finance income 8 14,626 -
Finance expense 8 (39,315) (12,992)
Changes in fair value on interest rate derivatives 19 10,024 -
Profit on disposal of interest rate derivatives 2,878 -
(Loss)/Profit before taxation (144,866) 110,303
Tax charge for the year 9 - -
(Loss)/Profit for the year (144,866) 110,303
Items to be reclassified to profit or loss in
subsequent periods
Fair value movements in interest rate derivatives 19 1,068 5,566
Total comprehensive (loss)/income for the year (143,798) 115,869
Total comprehensive (loss)/income for the year attributable (143,798) 115,869
to ordinary Shareholders
Earnings per share - basic and diluted 10 (11.7) pence 11.3 pence
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
As at 30 June 2023
Notes As at As at
30 June 2023 £'000 30 June 2022 £'000
Non-current assets
Property, plant and equipment - 129
Investment properties 12 1,685,690 1,561,590
Investment in joint ventures 14 - 177,140
Contract fulfilment asset - 93
Financial asset at amortised cost 16 10,819 10,626
Interest rate derivatives 19 37,198 5,114
Total non-current assets 1,733,707 1,754,692
Current assets
Interest rate derivatives 19 20,384 -
Financial assets held at fair value through profit and loss 15 - 283
Trade and other receivables 17 142,155 1,863
Cash and cash equivalents 37,481 51,200
Total current assets 200,020 53,346
Total assets 1,933,727 1,808,038
Non-current liabilities
Bank borrowings 20 605,609 348,546
Total non-current liabilities 605,609 348,546
Current liabilities
Bank borrowings due within one year 20 61,856 -
Deferred rental income 21,557 16,360
Trade and other payables 18 26,979 10,677
Total current liabilities 110,392 27,037
Total liabilities 716,001 375,583
Net assets 1,217,726 1,432,455
Equity
Share capital 22 12,462 12,399
Share premium reserve 22 500,386 494,174
Capital reduction reserve 22 704,531 778,859
Retained earnings (2,957) 141,909
Cash flow hedge reserve 3,304 5,114
Total equity 1,217,726 1,432,455
Net asset value per share - basic and diluted 26 98 pence 116 pence
EPRA NTA per share 26 93 pence 115 pence
The consolidated financial information was approved and authorised for issue
by the Board of Directors on 19 September 2023 and were signed on its behalf
by
Nick Hewson
Chair
19 September 2023
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the year ended 30 June 2023
Share capital £'000 Share premium Cash flow hedge reserve £'000 Capital reduction Retained earnings £'000 Total £'000
reserve £'000 reserve
£'000
As at 1 July 2022 12,399 494,174 5,114 778,859 141,909 1,432,455
Comprehensive income for
the year
Loss for the year - - - - (144,866) (144,866)
Cash flow hedge reserve to profit for the year on disposal of interest rate - - (2,878) - - (2,878)
derivatives
Other comprehensive income - - 1,068 - - 1,068
Total comprehensive loss for the year - - (1,810) - (144,866) (146,676)
Transactions with owners
Ordinary shares issued at a premium during the year 63 6,301 - - - 6,364
Share issue costs - (89) - - - (89)
Interim dividends paid - - - (74,328) - (74,328)
As at 30 June 2023 12,462 500,386 3,304 704,531 (2,957) 1,217,726
Share capital £'000 Share premium reserve £'000 Cash flow hedge reserve £'000 Capital reduction Retained earnings £'000 Total £'000
reserve
£'000
As at 1 July 2021 8,107 778,859 (452) - 84,796 871,310
Comprehensive income for
the year
Profit for the year - - - - 110,303 110,303
Other comprehensive income - - 5,566 - - 5,566
Total comprehensive income for the year - - 5,566 - 110,303 115,869
Transactions with owners
Ordinary shares issued at a premium during the year 4,292 504,539 - - - 508,831
Share premium cancellation to capital reduction reserve - (778,859) - 778,859 - -
Share issue costs - (10,365) - - - (10,365)
Interim dividends paid - - - - (53,190) (53,190)
As at 30 June 2022 12,399 494,174 5,114 778,859 141,909 1,432,455
CONSOLIDATED CASH FLOW statement
For the year ended 30 June 2023
Notes Year to Year to
30 June 2023 £'000 30 June 2022 £'000
Operating activities
(Loss)/Profit for the year (attributable to ordinary Shareholders) (144,866) 110,303
Adjustments for:
Changes in fair value of interest rate derivatives measured at fair value 19 (10,024) -
through profit and loss
Changes in fair value of investment properties and associated rent guarantees 12 256,066 (21,820)
Movement in rent smoothing and lease incentive adjustments 3 (2,763) (2,654)
Finance income 8 (14,626) -
Finance expense 8 39,281 12,992
Share of income from joint venture 14 (23,232) (43,301)
Profit on disposal of interest rate derivative 19 (2,878) -
Profit on disposal of Joint Venture 14 (19,941) -
Cash flows from operating activities before changes 77,017 55,520
in working capital
(Increase) / decrease in trade and other receivables (548) 1,277
Decrease/(increase) in rent guarantee receivables 191 (87)
Increase in deferred rental income 5,198 4,299
Increase in trade and other payables 2,461 2,004
Net cash flows from operating activities 84,319 63,013
Investing activities
Acquisition of contract fulfilment assets - (8)
Disposal of Property, Plant & Equipment 222 -
Acquisition of investment properties 12 (362,630) (371,093)
Capitalised acquisition costs (14,681) (17,603)
Decrease/(Increase) in other financial assets 16 - (10,626)
Receipts from other financial assets 16 290 -
Investment in joint venture 14 (189,528) (3,518)
Proceeds from disposal of Joint Venture 14 292,636 -
Net cash flows used in investing activities (273,691) (402,848)
Notes Year to Year to
30 June 2023 £'000 30 June 2022 £'000
Financing activities
Proceeds from issue of Ordinary Share Capital 22 - 506,727
Costs of share issues 22 (89) (10,366)
Bank borrowings drawn 20 912,114 402,922
Bank borrowings repaid 20 (598,486) (464,029)
Loan arrangement fees paid (5,010) (2,187)
Bank interest paid (22,408) (9,846)
Settlement of interest rate derivatives 8,646 -
Settlement of Joint Venture Carried Interest (8,066) -
Sale of interest rate derivatives 19 2,878 -
Purchase of interest rate derivative 19 (44,255) -
Bank commitment fees paid (1,708) (681)
Dividends paid to equity holders (67,963) (51,084)
Net cash flows from financing activities 175,653 371,456
Net movement in cash and cash equivalents in the year (13,719) 31,621
Cash and cash equivalents at the beginning of the year 51,200 19,579
Cash and cash equivalents at the end of the year 37,481 51,200
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of preparation
General information
Supermarket Income REIT plc (the Company) is a company registered in England
and Wales with its registered office at 1 King William Street, London, United
Kingdom, EC4N 7AF. The principal activity of the Company and its subsidiaries
(the Group) is to provide its Shareholders with an attractive level of income
together with the potential for capital growth by investing in a diversified
portfolio of supermarket real estate assets in the UK.
At 30 June 2023 the Group comprised the Company and its wholly owned
subsidiaries as set out in Note 13.
Basis of preparation
The consolidated financial information set out in this preliminary
announcement covers the year to 30 June 2023, with comparative figures
relating to the year to 30 June 2022, and includes the results and net assets
of the Group. The financial information has been prepared on the basis of the
accounting policies set out in the financial statements for the year ended 30
June 2023. Whilst the financial information included in this announcement has
been computed in accordance with the recognition and measurement requirements
of UK adopted international accounting standards this announcement does not
itself contain sufficient information to comply with IFRS.
The financial information does not constitute the Group's financial statements
for the years ended 30 June 2023 or 30 June 2022, but is derived from those
financial statements. Those financial statements give a true and fair view of
the assets, liabilities, financial position and results of the Group.
Financial statements for the year ended 30 June 2022 have been delivered to
the Registrar of Companies and those for the year ended 30 June 2023 will be
delivered following the Company's AGM. The auditors' reports on both the 30
June 2023 and 30 June 2022 financial statements were unqualified; did not draw
attention to any matters by way of emphasis; and did not contain statements
under section 498 (2) or (3) of the Companies Act 2006.
The principal accounting policies applied in the preparation of the
consolidated financial statements are set out below. These policies have been
consistently applied to all years presented, other than where new policies
have been adopted.
Going concern
In light of the current Macroeconomic backdrop, the Directors have placed a
particular focus on the appropriateness of adopting the going concern basis in
preparing the Group's and Company's financial statements for the year ended 30
June 2023. In assessing the going concern basis of accounting the Directors
have had regard to the guidance issued by the Financial Reporting Council.
Liquidity
At 30 June 2023, the Group generated net cash flow from operating activities
of £84.3 million, held cash of £37.5 million and undrawn committed
facilities totalling £189.9 million with no capital commitments or contingent
liabilities.
From the sale of its interest in the Sainsburys Reversion Portfolio (SRP), the
Group received proceeds of £135.1 million post year end. £97.1 million of
this was used for working capital and debt repayment and £38.0 million
towards acquiring two stores (including acquisition costs). As at the date of
signing the annual report the Gross LTV of the group was 34.0%. The remainder
of the receivable of £1.5 million is conditional on the sale of the remaining
store in the SRP.
After the year end, the Group also reduced its debt capacity from £862.1
million to £680.5 million (see Note 20 for more information), leaving undrawn
committed facilities of over £100 million available.
The Directors are of the belief that the Group continues to be well funded
during the going concern period with no concerns over its liquidity.
Refinancing events
At the date of signing the financial statements, the Deka facility falls due
for repayment during the going concern period (August 2024). It is intended
that the facility will be refinanced prior to maturity, or if required, it
will be paid down in full the Group's available undrawn committed facilities
of over £100 million. All lenders have been supportive during the year and
have expressed commitment to the long-term relationship they wish to build
with the Company.
Covenants
The Group's debt facilities include covenants in respect of LTV and interest
cover, both projected and historic. All debt facilities, except for the
unsecured facilities, are ring-fenced with each specific lender.
The Directors have evaluated a number of scenarios as part of the Group's
going concern assessment and considered the impact of these scenarios on the
Group's continued compliance with secured debt covenants. The key assumptions
that have been sensitised within these scenarios are falls in rental income
and increases in administrative cost inflation.
As at the date of issuance of this Annual report 100% of contractual rent for
the period has been collected. The Group benefits from a secure income stream
from its property assets that are let to tenants with excellent covenant
strength under long leases that are subject to upward only rent reviews.
The list of scenarios are below and are all on top of the base case model
which includes prudent assumptions on valuations and cost inflation. No
sensitivity for movements in interest rates have been modelled as the Group is
fully hedged during the going concern assessment period.
Scenario Rental Income Costs
Base case scenario (Scenario 1) 100% contractual rent received when due and rent reviews based on forward Investment adviser fee based on terms of the signed agreement (percentage of
looking inflation curve, capped at the contractual rate of the individual NAV as per note 27), other costs 0.35% of NAV
leases.
Scenario 2 Rental income to fall by 25% Costs expected to remain the same as the base case.
Scenario 3 Rental Income expected to remain the same as the base case. 10% increases on base case costs to all administrative expenses
The Group continues to maintain covenant compliance for its LTV and ICR
thresholds throughout the going concern assessment period under each of the
scenarios modelled. One of the secured facilities in the Group has a debt
yield covenant, which is calculated as the passing rent divided by the loan
balance for the properties secured against the lender. The debt yield covenant
only would be breached for this facility if rental income is reduced by 6%
during the going concern assessment period. The Board considers this scenario
highly unlikely given the underlying covenant strength of the tenants.
Furthermore, there are remedies available at the Group's disposal which
includes reducing a portion of the outstanding debt from available undrawn
facilities or providing additional security over properties that are currently
unencumbered. The lowest amount of ICR headroom experienced in the
worst-case stress scenarios was 22%. Based on the latest bank commissioned
valuations, Property values would have to fall by more than 21% before LTV
covenants are breached, and 10% against 30 June 2023 Company valuations.
Similarly, the strictest interest cover covenant within each of the
ring-fenced banking groups is 225%, where the portfolio is forecast to have an
average interest cover ratio of 572% during the going concern period.
Having reviewed and considered three modelled scenarios, the Directors
consider that the Group has adequate resources in place for at least 12 months
from the date of these results and have therefore adopted the going concern
basis of accounting in preparing the Annual Report.
Assessment of viability
The period over which the Directors consider it feasible and appropriate to
report on the Group's viability is the five-year period to 30 June 2028. This
period has been selected because it is the period that is used for the Group's
medium-term business plans and individual asset performance forecasts. The
assumptions underpinning these forecast cash flows and covenant compliance
forecasts were sensitised to explore the resilience of the Group to the
potential impact of the Group's significant risks, or a combination of those
risks. The principal risks on pages 71 to 84 summarise those matters that
could prevent the Group from delivering on its strategy. A number of these
principal risks, because of their nature or potential impact, could also
threaten the Group's ability to continue in business in its current form if
they were to occur. The Directors paid particular attention to the risk of a
deterioration in economic outlook which could impact property fundamentals,
including investor and occupier demand which would have a negative impact on
valuations, and give rise to a reduction in the availability of finance.
The sensitivities performed were designed to be severe but plausible; and to
take full account of the availability of mitigating actions that could be
taken to avoid or reduce the impact or occurrence of the underlying risks.
Viability Statement
The Board has assessed the prospects of the Group over the five years from the
balance sheet date to 30 June 2028, which is the period covered by the Group's
longer-term financial projections. The Board considers five years to be an
appropriate forecast period since, although the Group's contractual income
extends beyond five years, the availability of most finance and market
uncertainty reduces the overall reliability of forecast performance over a
longer period.
The Board considers the resilience of projected liquidity, as well as
compliance with secured debt covenants and UK REIT rules, under a range of RPI
and property valuation assumptions.
The principal risks and the key assumptions that were relevant to this
assessment are as follows:
Risk Assumption
Borrowing risk The Group continues to comply with all relevant loan covenants. The Group is
able to refinance all debt falling due within the viability assessment period
on acceptable terms.
Interest Rate Risk The increase in variable interest rates are managed by reduction of variable
debt from cash inflows and utilising interest rate derivatives to limit the
exposure to variable debt.
Liquidity risk The Group continues to generate sufficient cash to cover its costs while
retaining the ability to make distributions.
Tenant risk Tenants (or guarantors where relevant) comply with their rental obligations
over the term of their leases and no key tenant suffers an insolvency event
over the term of the review.
Based on the work performed, the Board has a reasonable expectation that the
Group will be able to continue in business over the five-year period of its
assessment.
Accounting convention and currency
The consolidated financial information (the "financial information") has been
prepared on a historical cost basis, except that investment properties, rental
guarantees and interest rate derivatives measured at fair value.
The financial information is presented in Pounds Sterling and all values are
rounded to the nearest thousand (£'000), except where otherwise indicated.
Pounds Sterling is the functional currency of the Company and the presentation
currency of the Group.
Adoption of new and revised standards
In the current financial year, the Group has adopted a number of minor
amendments to standards effective in the year issued by the IASB as adopted by
the UK Endorsement Board, none of which have had a material impact on the
Group.
There was no material effect from the adoption of other amendments to IFRS
effective in the year. They have no significant impact on the Group as they
are either not relevant to the Group's activities or require accounting which
is consistent with the Group's current accounting policies.
Standards and interpretations in issue not yet adopted
The following are new standards, interpretations and amendments, which are not
yet effective, and have not been early adopted in this financial information,
that will or may have an effect on the Group's future financial statements:
· Amendments to IAS 1 which are intended to clarify the requirements
that an entity applies in determining whether a liability is classified as
current or non-current. The amendments are intended to be narrow-scope in
nature and are meant to clarify the requirements in IAS 1 rather than modify
the underlying principles (effective for periods beginning on or after 1
January 2024).
The amendments include clarifications relating to:
- How events after the end of the reporting period affect liability
classification
- What the rights of an entity must be in order to classify a
liability as non-current
- How an entity assesses compliance with conditions of a liability
(e.g. bank covenants)
- How conversion features in liabilities affect their classification
The amendment is not expected to have an impact on the presentation or
classification of the liabilities in the Group based on rights that are in
existence at the end of the reporting period.
· IFRS S1 General Requirements for Disclosure of Sustainability-related
Financial Information. IFRS S1 sets out general requirements for the
disclosure of material information about sustainability-related financial
risks and opportunities and other general reporting requirements (periods
beginning after 1 January 2024).
· IFRS S2 Climate-related Disclosures. IFRS S2 sets out disclosure
requirements that are specific to climate-related matters (periods beginning
after 1 January 2024).
The Group acknowledges the issue of these new standards by the International
Sustainability Standards Board's (ISSB) will monitor the consultation and
decision process being undertaken by the UK Government and FCA in determining
how these standards are implemented by UK companies.
There are other new standards and amendments to standards and interpretations
which have been issued that are effective in future accounting periods, and
which the Group has decided not to adopt early. None of these are expected to
have a material impact on the condensed consolidated financial statements of
the Group.
Significant accounting judgements, estimates and assumptions
The preparation of this financial information in accordance with IFRS requires
the Directors of the Company to make judgements, estimates and assumptions
that affect the reported amounts recognised in the financial information.
Key estimate: Fair value of investment properties
The fair value of the Group's investment properties is determined by the
Group's independent valuer on the basis of market value in accordance with the
RICS Valuation - Global Standards (the 'Red Book'). Recognised valuation
techniques are used by the independent valuer which are in accordance with
those recommended by the International Valuation Standard Committee and
compliant with IFRS 13 "Fair Value Measurement."
The independent valuer did not include any material valuation uncertainty
clause in relation to the valuation of the Group's investment property for 30
June 2023 or 30 June 2022.
The independent valuer is considered to have sufficient current local and
national knowledge of the supermarket property market and the requisite skills
and understanding to undertake the valuation competently.
In forming an opinion as to fair value, the independent valuer makes a series
of assumptions, which are typically market-related, such as those in relation
to net initial yields and expected rental values. These are based on the
independent valuer's professional judgement. Other factors taken into account
by the independent valuer in arriving at the valuation of the Group's
investment properties include the length of property leases, the location of
the properties and the strength of tenant covenants.
The fair value of the Group's investment properties as determined by the
independent valuer, along with the significant methods and assumptions used in
estimating this fair value, are set out in note 12.
Key estimate: Fair value of interest rate derivatives
Derivatives are valued in accordance with IFRS 13 "Fair Value Measurement" by
reference to interbank bid market rates as at the close of business on the
last working day prior to each reporting date. The fair values are calculated
using the present values of future cash flows, based on market forecasts of
interest rates and adjusted for the credit risk of the counterparties. The
amounts and timing of future cash flows are projected on the basis of the
contractual terms.
The fair value of the Group's interest rate derivatives, along with further
details of the valuation methods used, are detailed in note 19.
Key judgement: Joint ventures - joint control
In prior years, the Group entered into a 50:50 joint venture with the British
Airways Pension Trustees Limited to acquire 100% of the issued share capital
in Horndrift Limited for a combined total consideration of £102 million plus
costs. The joint venture also acquired 100% of the issued share capital in
Cornerford Limited for a combined total consideration of £115 million plus
costs (together "the Joint Venture Interest").
Horndrift Limited and Cornerford Limited each hold a 25.2% beneficial interest
in a property trust arrangement / bond securitisation structure (the
"Structure") which previously held a portfolio of 26 Sainsbury's supermarket
properties funded by bonds which mature in 2023. During the year, Sainsbury's
exercised options to acquire 21 of these stores within the Structure and it
has been determined that the exercise of the purchase options by Sainsbury's
resulted in the performance obligation being satisfied for a sale of the
properties in accordance with IFRS 15. The JV is deemed to hold a contractual
receivable from Sainsbury's plc in respect of these 21 properties.
During the year, the Group acquired the British Airways Pension Trustees
Limited stake in the joint venture, meaning the Group had a beneficial
interest in over 50% of the underlying property pool, via its 100% ownership
in Horndrift and Cornerford.
The classification and accounting treatment of the Joint Venture Interest in
the property trust arrangement in the Group's consolidated financial
information is subject to significant judgement. By reference to the
contractual arrangements and deeds that regulate the Structure, it was
necessary to determine whether the Joint Venture Interest, together with the
other key parties of the Structure had the ability to jointly control the
Structure through their respective rights as defined by the contractual
arrangements and deeds of the Structure. The review of the Joint Venture
Interest and the other key parties' rights required significant judgement in
assessing whether the rights identified were substantive as defined by IFRS 10
Consolidated Financial Statements, principally in respect of whether there
were any economic barriers that prevent the joint venture investment or the
other key parties from exercising their rights. Through assessing the expected
possible outcomes either before or upon maturity of the Structure it was
determined that there were no significant economic barriers that would prevent
Horndrift Limited, Cornerford Limited or the other key parties from exercising
their rights under the contractual arrangements and deeds of the Structure.
The Directors therefore concluded that through its Joint Venture Interest, the
Group indirectly has joint control of the Structure as defined by IFRS 10
Consolidated Financial Statements. As such the Group's interest in the
Structure is accounted for using the equity method of accounting under IAS 28.
Following the additional Joint Venture interest acquired during the year, the
Group was deemed to still jointly control the Structure as any change to the
contractual arrangements and deeds that regulate the Structure, requires
unanimous consent from all beneficial holders. Therefore, the equity method of
accounting continued to be used until the disposal of the investment in joint
venture which occurred during the year (see Note 14).
Key judgement: Acquisition of Joint Venture stake
During the year the Group acquired an additional 50% interest in the Group's
existing joint venture, Horner (Jersey) LP, from British Airways Pension
Trustees Limited for total consideration of £188.8 million. At the time of
the purchase the Directors assess whether the acquisition represents the
acquisition of an asset or the acquisition of a business.
Under the Definition of a Business (Amendments to IFRS 3 "Business
Combinations"), to be considered as a business, an acquired set of activities
and assets must include, at a minimum, an input and a substantive process that
together significantly contribute to the ability to create outputs. The
optional 'concentration test' is also applied, where if substantially all of
the fair value of gross assets acquired is concentrated in a single asset (or
a group of similar assets), the assets acquired would not represent a
business.
The concentration test was applied confirming that substantially all of the
fair value of the assets acquired were concentrated in an investment in joint
venture, being the Structure and was therefore accounted as an asset purchase.
Key judgement: Acquisition of investment properties
The Group has acquired and intends to acquire further investment properties.
At the time of each purchase the Directors assess whether an acquisition
represents the acquisition of an asset or the acquisition of a business.
Under the Definition of a Business (Amendments to IFRS 3 "Business
Combinations"), to be considered as a business, an acquired set of activities
and assets must include, at a minimum, an input and a substantive process that
together significantly contribute to the ability to create outputs. The
optional 'concentration test' is also applied, where if substantially all of
the fair value of gross assets acquired is concentrated in a single asset (or
a group of similar assets), the assets acquired would not represent a
business.
During the year, the group completed nine acquisitions. In nine cases the
concentration test was applied and met, resulting in the acquisitions being
accounted for as asset purchases.
All £362.6 million of acquisitions during the year were accounted for as
asset purchases.
Key judgement: Acquisition of financial assets at amortised cost
The Group acquires properties under a sale and leaseback arrangements. At the
time of the purchase the Directors assess whether the acquisition represents
the acquisition of an investment property or a financial asset.
Under IFRS 15, for the transfer of an asset to be accounted for as a true
sale, satisfying a performance obligation of transferring control of an asset
must be met for this to be deemed a property transaction and accounted for
under IFRS 16. If not, it is accounted for as an asset under IFRS 9.
The Group acquired a property in the prior under a sale and leaseback
arrangement with a larger multi-channel supermarket operator. In this case, it
was deemed that as the lease was for a significant part of the asset's useful
economic life, control was not passed and the asset was therefore accounted
for under IFRS 9 as an amortised cost asset.
2. Summary of significant accounting policies
The principal accounting policies applied in the preparation of the
consolidated financial information are set out below.
2.1. Basis of consolidation
The consolidated financial information comprises the financial information of
the Company and all of its subsidiaries drawn up to 30 June 2023.
Subsidiaries are those entities including special purpose entities, directly
or indirectly controlled
by the Company. Control exists when the Company is exposed or has rights to
variable returns from
its investment with the investee and has the ability to affect those returns
through its power over
the investee. In assessing control, potential voting rights that presently are
exercisable are taken
into account.
The financial information of subsidiaries is included in the consolidated
financial information from
the date that control commences until the date that control ceases.
In preparing the consolidated financial information, intra group balances,
transactions and unrealised gains or losses are eliminated in full.
Uniform accounting policies are adopted for all entities within the Group.
2.2. Segmental information
The Directors are of the opinion that the Group is currently engaged in a
single segment business, being investment in United Kingdom in supermarket
property assets; the non-supermarket properties are ancillary in nature to the
supermarket property assets and are therefore not segmented.
2.3. Rental income
Rental income arising on investment properties is accounted for in profit or
loss on a straight-line basis over the lease term, as adjusted for the
following:
· Any rental income from fixed and minimum guaranteed rent review uplifts
is recognised on
a straight-line basis over the lease term, variable lease uplift calculations
are not rebased when a rent review occurs and the variable payment becomes
fixed;
· Lease incentives are spread evenly over the lease term, even if payments
are not made on such a basis. The lease term is the non-cancellable period of
the lease together with any further term for which the tenant has the option
to continue the lease, where, at the inception of the lease, the Directors are
reasonably certain that the tenant will exercise that option.
Contingent rents, such as those arising from indexed-linked rent uplifts or
market based rent reviews, are recognised in the period in which they are
earned.
Where income is recognised in advance of the related cash flows due to fixed
and minimum guaranteed rent review uplifts or lease incentives, an adjustment
is made to ensure that the carrying value of the relevant property, including
the accrued rent relating to such uplifts or lease incentives, does not exceed
the external valuation.
Rental income is invoiced in advance with that element of invoiced rental
income that relates to a future period being included within deferred rental
income in the consolidated statement of financial position.
Leases classified under IFRS 9 as financial assets recognise income received
from the tenant between finance income and a reduction of the asset value,
based on the interest rate implicit in the lease.
2.4. Service charge income
Service charge income represents amounts billed to tenants for services
provided in conjunction with leased properties based on budgeted service
charge expenditure for a given property over a given service charge year. The
Company recognises service charge income on a straight-line basis over the
service charge term.
2.5. Service charge expense
Service charge expense represents a wide range of costs related to the
operation and upkeep of the leased properties. These costs are allocated and
charged to tenants based on agreed terms and calculations as outlined in the
lease agreements with a portion being borne by the landlord where agreed.
2.6. Finance income
Finance income consists principally of interest receivable from interest rate
derivatives and income from financial assets held at amortised cost. An
adjustment is applied to reclassify amounts received upon periodic settlement
of interest rate derivatives assets from change in fair value to interest
income.
2.7. Finance expense
Finance expenses consist principally of interest payable and the amortisation
of loan arrangement fees.
Loan arrangement fees are expensed using the effective interest method over
the term of the relevant loan. Interest payable and other finance costs,
including commitment fees, which the Group incurs in connection with bank
borrowings, are expensed in the period to which they relate.
2.8. Administrative and other expenses
Administrative and other expenses, including the investment advisory fees
payable to the Investment Adviser, are recognised as a profit or loss on an
accruals basis.
2.9. Dividends payable to Shareholders
Dividends to the Company's Shareholders are recognised when they become
legally payable, as a reduction in equity in the financial information.
Interim equity dividends are recognised when paid. Final equity dividends will
be recognised when approved by Shareholders at an AGM.
2.10. Taxation
Non-REIT taxable income
Taxation on the Group's profit or loss for the year that is not exempt from
tax under the UK-REIT regulations comprises current and deferred tax, as
applicable. Tax is recognised in profit or loss except to the extent that it
relates to items recognised as direct movements in equity, in which case it is
similarly recognised as a direct movement in equity.
Non-REIT taxable income continued
Current tax is tax payable on any non-REIT taxable income for the year, using
tax rates enacted or substantively enacted at the end of the relevant period.
Entry to the UK-REIT regime
The Group obtained its UK-REIT status effective from 21 December 2017. Entry
to the regime results in, subject to continuing relevant UK-REIT criteria
being met, the profits of the Group's property rental business, comprising
both income and capital gains, being exempt from UK taxation.
The Group intends to ensure that it complies with the UK-REIT regulations on
an on-going basis and regularly monitors the conditions required to maintain
REIT status.
2.11. Investment properties
Investment properties consist of land and buildings which are held to earn
income together with the potential for capital growth.
Investment properties are recognised when the risks and rewards of ownership
have been transferred and are measured initially at cost, being the fair value
of the consideration given, including transaction costs. Where the purchase
price (or proportion thereof) of an investment property is settled through the
issue of new ordinary shares in the Company, the number of shares issued is
such that the fair value of the share consideration is equal to the fair value
of the asset being acquired. Transaction costs include transfer taxes and
professional fees for legal services. Any subsequent capital expenditure
incurred in improving investment properties is capitalised in the period
incurred and included within the book cost of the property. All other property
expenditure is written off in profit or loss as incurred.
After initial recognition, investment properties are measured at fair value,
with gains and losses recognised in profit or loss in the period in which they
arise.
Gains and losses on disposals of investment properties will be determined as
the difference between the net disposal proceeds and the carrying value of the
relevant asset. These will be recognised in profit or loss in the period in
which they arise.
Initially, rental guarantees are recognised at their fair value and separated
from the purchase price on initial recognition of the property being
purchased. They are subsequently measured at their fair value at each
reporting date with any movements recognised in the profit or loss.
2.12. Joint ventures
Interests in joint ventures, including the additional interest acquired during
the year, are accounted for using the equity method of accounting as per IAS
28. The Group's joint ventures are arrangements in which the partners have
joint control and rights to the net assets of the arrangement. Investments in
joint ventures are carried in the statement of financial position at cost
as adjusted by post-acquisition changes in the Group's share of the net assets
of the joint venture, less any impairment or share of income adjusted for
dividends. In assessing whether a particular entity
is controlled, the Group considers the same principles as control over
subsidiaries as described in
note 2.1.
2.13. Property, plant and equipment
Property, plant and equipment comprises of rooftop solar panels. Rooftop solar
panels are stated at cost less accumulated depreciation and any recognised
impairment loss. Depreciation is recognised over the useful lives of the
equipment, using the straight-line method at a rate of between 25- 30 years
depending on the useful economic life.
Residual value is reviewed at least at each financial year and there is no
depreciable amount if
residual value is the same as, or exceeds, book value. Any gain or loss
arising on the disposal of the rooftop solar panels are determined as the
difference between the sales proceeds and the carrying amount of the asset.
2.14. Financial assets and liabilities
Financial assets and liabilities are recognised when the relevant Group entity
becomes a party to the unconditional contractual terms of an instrument.
Unless otherwise indicated, the carrying amounts
of financial assets and liabilities are considered by the Directors to be
reasonable estimates of their
fair values.
Financial assets
Financial assets are recognised initially at their fair value. All of the
Group's financial assets, except interest rate derivatives, are held at
amortised cost using the effective interest method, less any impairment.
For assets where changes in cash flows are linked to changes in an inflation
index, the Group updates the effective interest rate at the end of each
reporting period and this is reflected in the carrying amount of the asset
each reporting period until the asset is derecognised.
Cash and cash equivalents
Cash and cash equivalents consist of cash in hand and short-term deposits in
banks with an original maturity of three months or less.
Trade and other receivables
Trade and other receivables, including rents receivable, are recognised and
carried at the lower of their original invoiced value and recoverable amount.
Provisions for impairment are calculated using an expected credit loss model.
Balances will be written-off in profit or loss in circumstances where the
probability of recovery is assessed as being remote.
Trade and other payables
Trade and other payables are recognised initially at their fair value and
subsequently at amortised cost.
Bank borrowings
Bank borrowings are initially recognised at fair value net of attributable
transaction costs. After initial recognition, bank borrowings are subsequently
measured at amortised cost, using the effective interest method. The effective
interest rate is calculated to include all associated transaction costs.
In the event of a modification to the terms of a loan agreement, the Group
considers both the quantitative and qualitative impact of the changes. Where a
modification is considered substantial, the existing facility is treated as
settled and the new facility is recognised. Where the modification is not
considered substantial, the carrying value of the liability is restated to the
present value of the cash flows of the modified arrangement, discounted using
the effective interest rate of the original arrangement. The difference is
recognised as a gain or loss on refinancing through the statement of
comprehensive income.
Derivative financial instruments and hedge accounting
The Group's derivative financial instruments currently comprise of interest
rate swaps/caps. Derivatives designated as hedging instruments utilise hedge
accounting under IAS 39. Derivatives not designated under hedge accounting are
accounted for under IFRS 9.
These instruments are used to manage the Group's cash flow interest rate risk.
The instruments are initially recognised at fair value on the date that the
derivative contract is entered into, being the cost of any premium paid at
inception, and are subsequently re-measured at their fair value at each
reporting date.
Fair value measurement of derivative financial instruments
The fair value of derivative financial instruments is the estimated amount
that the Group would receive or pay to terminate the agreement at the period
end date, taking into account current interest rate expectations and the
current credit rating of the relevant group entity and its counterparties.
The Group uses valuation techniques that are appropriate in the circumstances
and for which sufficient data is available to measure fair value, maximising
the use of relevant observable inputs and minimising the use of unobservable
inputs significant to the fair value measurement as a whole.
A number of assumptions are used in determining the fair values including
estimations over future interest rates and therefore future cash flows. The
fair value represents the net present value of the difference between the cash
flows produced by the contract rate and the valuation rate.
Hedge accounting
At the inception of a hedging transaction, the Group documents the
relationship between hedging instruments and hedged items, as well as its risk
management objectives and strategy for undertaking the hedging transaction.
The Group also documents its assessment, both at hedge inception and on an
ongoing basis, of whether the derivatives that are used in hedging
transactions are highly effective in offsetting changes in fair values or cash
flows of hedged items.
Assuming the criteria for applying hedge accounting continue to be met the
effective portion of gains and losses on the revaluation of such instruments
are recognised in other comprehensive income and accumulated in the cash flow
hedging reserve. Any ineffective portion of such gains and losses will be
recognised in profit or loss within finance income or expense as appropriate.
The cumulative gain or loss recognised in other comprehensive income is
reclassified from the cash flow hedge reserve to profit or loss (finance
expense) at the same time as the related hedged interest expense is
recognised.
Interest rate derivatives that do not qualify under hedge accounting are
carried in the Group Statement of Financial Position at fair value, with
changes in fair value recognised in the Group Statement of Comprehensive
Income, net of interest receivable/payable from the derivatives shown in the
finance income or expense line.
2.15. Equity instruments
Equity instruments issued by the Company are recorded at the amount of the
proceeds received, net of directly attributable issue costs. Costs not
directly attributable to the issue are immediately expensed in profit or loss.
Further details of the accounting for the proceeds from the issue of shares in
the period are disclosed in note 22.
2.16. Fair value measurements and hierarchy
Fair value is the price that would be received on the sale of an asset, or
paid to transfer a liability,
in an orderly transaction between market participants at the measurement date.
The fair value measurement is based on the presumption that the transaction
takes place either in the principal market for the asset or liability, or in
the absence of a principal market, in the most advantageous market. It is
based on the assumptions that market participants would use when pricing the
asset
or liability, assuming they act in their economic best interest. A fair value
measurement of a non-financial asset takes into account the best and highest
value use for that asset.
The fair value hierarchy to be applied under IFRS 13 is as follows:
Level 1: Quoted (unadjusted) market prices in active markets for identical
assets or liabilities.
Level 2: Valuation techniques for which the lowest level input that is
significant to the fair value measurement is directly or indirectly
observable.
Level 3: Valuation techniques for which the lowest level input that is
significant to the fair value measurement is unobservable.
For assets and liabilities that are carried at fair value and which will be
recorded in the financial information on a recurring basis, the Group will
determine whether transfers have occurred between levels in the hierarchy by
reassessing categorisation at the end of each reporting period.
3. Gross rental income
Year to Year to
30 June 2023 £'000 30 June 2022 £'000
Rental income - freehold property 53,119 44,332
Rental income - long leasehold property 42,669 28,031
Lease surrender income 35 -
Gross rental income 95,823 72,363
Year to Year to
30 June 2023 30 June 2022
£'000 £'000
Property insurance recoverable 585 449
Service charge recoverable 5,354 1,637
Total property insurance and service charge income 5,939 2,086
Total property income 101,762 74,449
Included within rental income is a £2,512,000 (2022: £2,654,000) rent
smoothing adjustment that arises as a result of IFRS 16 'Leases' requiring
that rental income in respect of leases with rents increasing by a fixed
percentage be accounted for on straight-line basis over the lease term. During
the year this resulted in an increase in rental income and an offsetting entry
being recognised in profit or loss as an adjustment to the investment property
revaluation.
On an annualised basis, rental income comprises £49,620,000 (2022:
£34,420,000) relating to the Group's largest tenant and £27,194,000 (2022:
£24,265,000) relating to the Group's second largest tenant. There were no
further tenants representing more than 10% of annualised gross rental income
during either year.
4. Service charge expense
Year to Year to
30 June 2023 £'000 30 June 2022 £'000
Property insurance expenses 715 639
Service charge expenses 5,803 1,699
Total property insurance and service charge expense 6,518 2,338
5. Administrative and other expenses
Year to Year to
30 June 2023 £'000 30 June 2022 £'000
Investment Adviser fees (Note 27) 10,292 9,405
Directors' remuneration (Note 7) 364 269
Corporate administration fees 1,108 893
Legal and professional fees 1,626 2,249
Other administrative expenses 2,039 1,121
Total administrative and other expenses 15,429 13,937
The fees relating to the issue of shares in the year have been treated as
share issue expenses and offset against the share premium reserve.
6. Operating (loss)/profit
Operating (loss)/profit is stated after charging fees for:
Year to Year to
30 June 2023 £'000 30 June 2022 £'000
Audit of the Company's consolidated and individual 260 190
financial statements
Audit of subsidiaries, pursuant to legislation 95 64
Total audit services 355 254
Audit related services: interim review 38 32
Total audit and audit related services 393 286
The Group's auditor also provided the following services in relation to
corporate finance services:
Year to Year to
30 June 2023 £'000 30 June 2022 £'000
Other non-audit services: corporate finance services in connection - 78
with the October 2021 and April 2022 placings
Other non-audit services: corporate finance services in connection with the - 45
transition to premium segment of LSE
Other non-audit services: corporate finance services 65 -
Total other non-audit services 65 123
Total fees charged by the Group's auditor 458 409
7. Directors' remuneration
The Group had no employees in the current or prior year. The Directors, who
are the key management personnel of the Company, are appointed under letters
of appointment for services. Directors' remuneration, all of which represents
fees for services provided, was as follows:
Year to Year to
30 June 2023 £'000 30 June 2022 £'000
Directors' fees 330 245
Employer's National Insurance Contribution 34 24
Total Directors' remuneration 364 269
The highest paid Director received £75,000 (2022: £70,000) for services
during the year.
8. Finance income and expense
Finance income Year to Year to
30 June 2023 £'000 30 June 2022 £'000
Interest received on bank deposits 53 -
Income from financial assets held at amortised cost (note 16) 483 -
Finance income on unwinding of discounted receivable (note 17) 2,376 -
Finance income on settlement of interest rate derivatives (note 19) 11,714 -
Total finance income 14,626 -
Finance expense Year to Year to
30 June 2023 £'000 30 June 2022 £'000
Interest payable on bank borrowings and hedging arrangements 29,707 9,565
Finance expense on settlement of interest rate derivatives (note 19) - 296
Commitment fees payable on bank borrowings 1,571 969
Amortisation of loan arrangement fees* 8,037 2,157
Amortisation of interest rate derivative premium (Note 19) - 5
Total finance expense 39,315 12,992
*This includes a one-off exceptional charge in the year to 30 June 2023 of
£1.52 million, relating to the acceleration of unamortised arrangement fees
in respect of the modification of the Wells Fargo and Barclays/RBC facilities
under IFRS 9. It also includes a one-off loan arrangement fee for the
short-term J.P. Morgan loan of £4.0 million.
The above finance expense includes the following in respect of liabilities not
classified as fair value through profit and loss:
Year to Year to
30 June 2023 £'000 30 June 2022 £'000
Total interest expense on financial liabilities held at amortised cost 37,744 11,723
Fee expense not part of effective interest rate for financial liabilities held 1,571 969
at amortised cost
Total finance expense 39,315 12,692
9. Taxation
Tax charge in profit or loss
Year to Year to
30 June 2023 £'000 30 June 2022 £'000
Corporation tax - -
B) Total tax expense
Tax charge in profit and loss as per the above - -
Share of tax expense of equity accounted joint ventures (400) 987
Total tax (credit)/expense (400) 987
The Company and its subsidiaries operate as a UK Group REIT. Subject to
continuing compliance with certain rules, the UK REIT regime exempts the
profits of the Group's property rental business from UK corporation tax. To
operate as a UK Group REIT a number of conditions had to be satisfied in
respect of the Company, the Group's qualifying activity and the Group's
balance of business. Since the 21 December 2017 the Group has met all such
applicable conditions.
The reconciliation of the (Loss)/profit before tax multiplied by the blended
rate of corporation tax for the year of 20.4% (2022: 19%) to the total tax
charge is as follows:
C) Reconciliation of the total tax charge for the year Year to Year to
30 June 2023 £'000 30 June 2022 £'000
(Loss)/Profit on ordinary activities before taxation (144,866) 110,303
Theoretical tax at UK standard corporation tax rate of 20.4% (2022: 19%) (29,553) 20,958
Effects of:
Investment property and derivative revaluation not taxable 49,680 (4,146)
Disposal of interest rate derivative (587) -
Residual business losses 4,428 -
Other non-taxable items (8,807) -
REIT exempt income (15,161) (16,812)
Share of tax expense of equity accounted joint ventures (400) 987
Total tax (credit)/expense for the year (400) 987
UK REIT exempt income includes property rental income that is exempt from UK
corporation tax in accordance with Part 12 of CTA 2010.
No deferred tax asset has been recognised in respect of the Group's residual
carried forward tax losses of £36.2 million as, given the Group's REIT
status, it is considered unlikely that these losses will be utilised.
10. Earnings per share
Earnings per share (EPS) amounts are calculated by dividing the profit or loss
for the period attributable to ordinary equity holders of the Company by the
weighted average number of ordinary shares in issue during the period. As
there are no dilutive instruments outstanding, basic and diluted earnings per
share are identical.
The European Public Real Estate Association (EPRA) publishes guidelines for
calculating adjusted earnings on a comparable basis. EPRA EPS is a measure of
EPS designed by EPRA to enable entities to present underlying earnings from
core operating activities, which excludes fair value movements on investment
properties.
The Company has also included an additional earnings measure called "Adjusted
Earnings" and "Adjusted EPS." Adjusted earnings(53) is a performance measure
used by the Board to assess the Group's financial performance and dividend
payments. The metric adjusts EPRA earnings by deducting one-off items such as
debt restructuring costs and the Joint Venture acquisition loan arrangement
fee which are non-recurring in nature and adding back finance income on
derivatives held at fair value through profit and loss. Adjusted Earnings is
considered a better reflection of the measure over which the Board assesses
the Group's trading performance and dividend cover.
Finance income received from derivatives held at fair value through profit and
loss are added back to EPRA earnings as this reflects the cash received from
the derivatives in the period and therefore gives a better reflection of the
Group's net finance costs.
Debt restructuring costs relate to the acceleration of unamortised arrangement
fees following the partial transition of the Group's debt structure from
secured to unsecured.
The Joint Venture acquisition loan arrangement fee relates to the upfront
amount payable to J.P. Morgan in respect of the short-term facility taken out
in January 2023 to fund the Group's purchase of BAPTL's 50% interest in the
joint venture. This was specific debt taken out to finance the transaction to
acquire and then dispose of the joint venture, whilst protecting the Group
from any recourse on unwind of the joint venture's financial asset. This
adjustment reflects the arrangement fee only, as the Group largely had other
committed undrawn facilities that it could have utilised.
The reconciliation of IFRS Earnings, EPRA Earnings and Adjusted Earnings is
shown below:
Year to Year to
30 June 2023
30 June 2022
£' 000 £' 000
Net (loss) / profit attributable to ordinary shareholders (144,866) 110,303
EPRA adjustments:
Changes in fair value of investment properties and rental guarantees 256,066 (21,820)
Changes in fair value of interest rate derivatives measured at fair value (10,024) -
through profit and loss
Profit on disposal of interest rate derivatives (2,878) -
Group share of changes in fair value of joint venture investment properties (11,486) 6,021
Group share of gain on disposal of joint venture investment properties - (37,102)
Gain on disposal of investments in joint venture (19,940) -
Finance income received on interest rate derivatives held at fair value (9,671) -
through profit and loss
EPRA earnings 57,201 57,402
Adjustments for:
Finance income received on interest rate derivatives held at fair value 9,671 -
through profit and loss
One-off restructuring costs in relation to the acceleration of unamortised 1,518 -
arrangement fees
Joint Venture acquisition loan arrangement fee 4,009 -
Adjusted Earnings 72,399 57,402
Number(1) Number(1)
Weighted average number of ordinary shares 1,242,574,505 975,233,858
(1) Based on the weighted average number of ordinary shares in issue
Year to Year to
30 June 2023
30 June 2022
Pence per share ('p') Pence per share ('p')
Basic and Diluted EPS (11.7) 11.3
EPRA adjustments:
Changes in fair value of interest rate derivatives measured at FVTPL (0.8) -
Changes in fair value of investment properties 20.6 (2.2)
and rent guarantees
Group share of changes in fair value of joint venture investment properties (0.9) 0.6
Profit on disposal of interest rate derivatives (0.2) -
Group share of gain on disposal of joint venture investment properties (1.6) (3.8)
Finance income received on interest rate derivatives held at fair value (0.8) -
through profit and loss
EPRA EPS 4.6 5.9
Adjustments for:
Finance income received on interest rate derivatives held at fair value 0.8 -
through profit and loss
One-off restructuring costs in relation to the acceleration of unamortised 0.1 -
arrangement fees
Joint Venture acquisition loan arrangement fee 0.3 -
Adjusted EPRA EPS 5.8 5.9
11. Dividends
Year to Year to
30 June 2023 £'000 30 June 2022 £'000
Amounts recognised as a distribution to ordinary Shareholders
in the year:
Dividends paid 74,328 53,190
On 8 July 2022, the Board declared a fourth interim dividend for the year
ended 30 June 2022 of 1.485 pence per share, which was paid on 22 August 2022
to Shareholders on the register on 15 July 2022.
On 21 September 2022 the Board declared a first interim dividend for the year
ending 30 June 2023 of 1.5 pence per share, which was paid on 16 November 2022
to shareholders on the register on 7 October 2022.
On 12 January 2023, the Board declared a second interim dividend for the year
ending 30 June 2023 of 1.5 pence per share, which was paid on 23 February 2023
to shareholders on the register on 20 January 2023.
On 11 April 2023, the Board declared a third interim dividend for the year
ending 30 June 2023 of 1.5 pence per share, which was paid on 26 May 2023 to
shareholders on the register on 21 April 2023.
On 6 July 2023, the Board declared a fourth interim dividend for the year
ending 30 June 2023 of 1.5 pence per share, which was paid on 4 August 2023 to
shareholders on the register on 13 July 2023. This has not been included as a
liability as at 30 June 2023.
12. Investment properties
In accordance with IAS 40 "Investment Property", the Group's investment
properties have been independently valued at fair value by Cushman &
Wakefield, an accredited independent valuer with
a recognised and relevant professional qualification and with recent
experience in the locations and categories of the investment properties being
valued. The valuations have been prepared in accordance with the RICS
Valuation - Global Standards (the "Red Book") and incorporate the
recommendations
of the International Valuation Standards Committee which are consistent with
the principles set out
in IFRS 13.
The independent valuer in forming its opinion on valuation makes a series of
assumptions. As explained in note 2, all the valuations of the Group's
investment property at 30 June 2023 are classified as 'level 3' in the fair
value hierarchy defined in IFRS 13.
The valuations are ultimately the responsibility of the Directors.
Accordingly, the critical assumptions used in establishing the independent
valuation are reviewed by the Board.
Freehold £'000 Long Leasehold £'000 Total £'000
At 1 July 2022 903,850 657,740 1,561,590
Property additions 131,600 231,030 362,630
Capitalised acquisition costs 4,132 10,549 14,681
Revaluation movement (140,142) (113,069) (253,211)
Valuation at 30 June 2023 899,440 786,250 1,685,690
At 1 July 2021 723,540 424,840 1,148,380
Property additions 150,363 220,447 370,810
Capitalised acquisition costs 7,825 9,778 17,603
Revaluation movement 22,122 2,675 24,797
Valuation at 30 June 2022 903,850 657,740 1,561,590
Reconciliation of Investment Property to Independent Property Valuation Year to Year to
30 June 2023 £'000 30 June 2022
£'000
Investment Property at fair value per Group Statement of Financial Position 1,685,690 1,561,590
Market Value of Property classified as Financial Assets held at amortised cost 7,210 9,960
(Note 16)
Total Independent Property Valuation 1,692,900 1,571,550
There were nine property acquisitions during the year, of which two were
purchased through the acquisition of a corporate structure, rather than
acquiring the asset directly. All corporate acquisitions during the year have
been treated as asset purchases rather than business combinations because they
are considered to be acquisitions of properties rather than businesses.
Included within the carrying value of investment properties at 30 June 2023 is
£8,724,000 (2022: £6,212,000) in respect of the smoothing of fixed
contractual rent uplifts as described in note 3. The difference between rents
on a straight-line basis and rents actually receivable is included within the
carrying value of the investment properties but does not increase that
carrying value over fair value. The effect of this adjustment on the
revaluation movement during the year is as follows:
Year to Year to
30 June 2023 £'000 30 June 2022 £'000
Revaluation movement per above (253,211) 24,797
Rent smoothing adjustment (note 3) (2,512) (2,654)
Movements in associated rent guarantees and lease incentives (343) (323)
Change in fair value recognised in profit or loss (256,066) 21,820
Valuation techniques and key unobservable inputs
Valuation techniques used to derive fair values
The valuations have been prepared on the basis of market value which is
defined in the RICS Valuation Standards as 'the estimated amount for which an
asset or liability should exchange on the date of
the valuation between a willing buyer and a willing seller in an arm's length
transaction after proper marketing wherein the parties had each acted
knowledgeably, prudently and without compulsion'. Market value as defined in
the RICS Valuation Standards is the equivalent of fair value under IFRS.
The yield methodology approach is used when valuing the Group's properties
which uses market rental values capitalised with a market capitalisation rate.
This is sense-checked against the market comparable method (or market
comparable approach) where a property's fair value is estimated based on
comparable transactions in the market.
Unobservable inputs
Significant unobservable inputs include: the estimated rental value ("ERV")
based on market conditions prevailing at the valuation date and net initial
yield. Other unobservable inputs include but are not limited to the future
rental growth - the estimated average increase in rent based on both market
estimations and contractual situations, and the physical condition of the
individual properties determined by inspection.
A decrease in ERV would decrease the fair value. A decrease in net initial
yield would increase the
fair value.
Sensitivity of measurement of significant valuation inputs
As described in note 2 the determination of the valuation of the Group's
investment property portfolio is open to judgement and is inherently
subjective by nature.
Sensitivity analysis - impact of changes in net initial yields and rental
values
Year to Year to
30 June 2023 30 June 2022
Range of Net Initial Yields 4.7% - 7.4% 3.8% - 6.6%
Range of Rental values (passing rents or ERV as relevant) of Group's £0.3m - £5.1m £0.3m - £4.2m
Investment Properties
Weighted average of Net Initial Yields 5.6% 4.6%
Weighted average of Rental values (passing rents or ERV as relevant) of £2.8m £2.6m
Group's Investment Properties
The table below analyses the sensitivity on the fair value of investment
properties for changes in rental values and net initial yields:
+2% -2% +0.5% Net Initial Yield -0.5%
Rental value Rental value £m Net Initial Yield
£m £m £m
(Decrease)/increase in the fair value of investment properties as at 30 June 33.7 (33.7) (139.9) 168.1
2023
(Decrease)/increase in the fair value of investment properties as at 30 June 31.2 (31.2) (81.1) 90.7
2022
13. Subsidiaries
The entities listed in the following table were the subsidiary undertakings of
the Company at 30 June 2023 all of which are wholly owned. All but those noted
as Jersey entities below are subsidiary undertakings incorporated in England.
Company name Holding Nature of business
type
Supermarket Income Investments UK Limited(+) Direct Intermediate parent company
Supermarket Income Investments (Midco2) UK Limited(+) Direct Intermediate parent company
Supermarket Income Investments (Midco3) UK Limited(+) Direct Intermediate parent company
Supermarket Income Investments (Midco4) UK Limited(+) Direct Intermediate parent company
SII UK Halliwell (MIDCO) LTD(+) Direct Intermediate parent company
Supermarket Income Investments UK (Midco6) Limited(+) Direct Intermediate parent company
Supermarket Income Investments UK (Midco7) Limited(+) Direct Intermediate parent company
SUPR Green Energy Limited(+) Direct Energy provision company
SUPR Finco Limited(+) Direct Holding company
Supermarket Income Investments UK (NO1) Limited(+) Indirect Property investment
Supermarket Income Investments UK (NO2) Limited(+) Indirect Property investment
Supermarket Income Investments UK (NO3) Limited(+) Indirect Property investment
Supermarket Income Investments UK (NO4) Limited(+) Indirect Property investment
Supermarket Income Investments UK (NO5) Limited(+) Indirect Property investment
Supermarket Income Investments UK (NO6) Limited(+) Indirect Property investment
Supermarket Income Investments UK (NO7) Limited(+) Indirect Property investment
Supermarket Income Investments UK (NO8) Limited(+) Indirect Property investment
Supermarket Income Investments UK (NO9) Limited(+) Indirect Property investment
Supermarket Income Investments UK (NO10) Limited(+) Indirect Property investment
Supermarket Income Investments UK (NO11) Limited(+) Indirect Property investment
Supermarket Income Investments UK (NO12) Limited(+) Indirect Property investment
Supermarket Income Investments UK (NO16) Limited(+) Indirect Property investment
Supermarket Income Investments UK (NO16a) Limited(+) Indirect Property investment
Supermarket Income Investments UK (NO16b) Limited(+) Indirect Property investment
Supermarket Income Investments UK (NO16c) Limited(+) Indirect Property investment
Supermarket Income Investments UK (NO17) Limited(+) Indirect Property investment
TPP Investments Limited(+) Indirect Property investment
T (Partnership) Limited(+) Indirect Property investment
The TBL Property Partnership Indirect Property investment
Supermarket Income Investments UK (NO19) Limited(+) Indirect Property investment
Supermarket Income Investments UK (NO20) Limited(+) Indirect Property investment
Supermarket Income Investments UK (NO21) Limited(+) Indirect Property investment
Supermarket Income Investments UK (NO22) Limited(+) Indirect Property investment
Supermarket Income Investments UK (NO23) Limited(+) Indirect Property investment
Supermarket Income Investments UK (NO24) Limited(+) Indirect Property investment
Supermarket Income Investments UK (NO25) Limited(+) Indirect Property investment
Supermarket Income Investments UK (NO26) Limited(+) Indirect Property investment
Supermarket Income Investments UK (NO27) Limited(+) Indirect Property investment
Supermarket Income Investments UK (NO28) Limited(+) Indirect Property investment
Supermarket Income Investments UK (NO29) Limited(+) Indirect Property investment
Supermarket Income Investments UK (NO30) Limited(+) Indirect Property investment
Supermarket Income Investments UK (NO31) Limited(+) Indirect Property investment
Supermarket Income Investments UK (NO32) Limited(+) Indirect Property investment
Supermarket Income Investments UK (NO33) Limited(+) Indirect Property investment
Supermarket Income Investments UK (NO34) Limited(+) Indirect Property investment
Supermarket Income Investments UK (NO35) Limited^(-) Indirect Property investment
Supermarket Income Investments UK (NO36) Limited(+) Indirect Property investment
Supermarket Income Investments UK (NO37) Limited(+) Indirect Property investment
Supermarket Income Investments UK (NO38) Limited(+) Indirect Property investment
Supermarket Income Investments UK (NO39) Limited**^(-) Indirect Property investment
Supermarket Income Investments UK (NO40) Limited*(+) Indirect Property investment
Supermarket Income Investments UK (NO41) Limited*(+) Indirect Property investment
Supermarket Income Investments UK (NO42) Limited*(+) Indirect Property investment
Supermarket Income Investments UK (NO43) Limited*(+) Indirect Property investment
Supermarket Income Investments UK (NO44) Limited*(+) Indirect Property investment
Supermarket Income Investments UK (NO45) Limited*(+) Indirect Property investment
The Brookmaker Unit Trust**^(-) Indirect Property investment
Brookmaker Limited Partnership**(#) Indirect Property investment
Brookmaker (GP) Limited**(#) Indirect Property investment
Brookmaker (Nominee) Limited**(#) Indirect Property investment
Supermarket Income Investments UK (NO47) Limited*(+) Indirect Property investment
Horner (GP) Limited**^- Indirect Property investment
Horner (Jersey) Limited Partnership**^- Indirect Property investment
Horner REIT**^- Indirect Property investment
SII UK Halliwell (No1) LTD(+) Indirect Investment in Joint venture
SII UK Halliwell (No2) LTD(+) Indirect Investment in Joint venture
SII UK Halliwell (No3) LTD(+) Indirect Investment in Joint venture
SII UK Halliwell (No4) LTD(+) Indirect Investment in Joint venture
SII UK Halliwell (No5) LTD(+) Indirect Investment in Joint venture
SII UK Halliwell (No6) LTD(+) Indirect Investment in Joint venture
* New subsidiaries incorporated during the year ended 30 June 2023
** Subsidiaries acquired during the year ended 30 June 2023
^ Jersey registered entity
+ Registered office: 1 King William Street, London, United Kingdom, EC4N 7AF
- Registered office: 3rd Floor, Gaspe House, 66-72 Esplanade, St Helier,
Jersey, JE1 2LH
# Registered office: 8th Floor 1 Fleet Place, London, United Kingdom, EC4M 7RA
The following subsidiaries will be exempt from the requirements of the
Companies Act 2006 relating to the audit of individual accounts by virtue of
Section 479A of that Act.
Company name Companies House
Registration Number
SII UK Halliwell (MIDCO) LTD 12473355
SUPR Green Energy Limited 12890276
SII UK Halliwell (No1) LTD 12475261
SII UK Halliwell (No2) LTD 12475599
SII UK Halliwell (No3) LTD 12478141
SII UK Halliwell (No4) LTD 12604032
SII UK Halliwell (No5) LTD 12605175
SII UK Halliwell (No6) LTD 12606144
SUPR Finco Limited 14292760
14. Investment in joint ventures
Year to Year to
30 June 2023 30 June 2022
£'000 £'000
Opening balance 177,140 130,321
Additions* 206,656 3,518
Group's share of profit after tax 23,232 43,301
Disposal (407,028) -
Closing balance - 177,140
*Included within additions are £190.7 million of further investments made in the joint venture during the year and £15.9 million of net liabilities acquired on acquisition of Horner (Jersey) LP
In May 2020, the Group and British Airways Pension Trustees Limited (BAPTL)
formed a 50:50 joint venture (the "joint venture"), Horner (Jersey) LP. Horner
(Jersey) LP owns of 100% of the shares in Horner REIT, which acquired 100% of
the issued share capital in Horndrift Limited for a combined total
consideration of £102m plus costs on this date.
In February 2021, Horner REIT acquired 100% of the issued share capital in
Cornerford Limited for a combined total consideration of £115m plus costs.
Further amounts have been advanced since this date to fund operating costs and
taxation liabilities on a pro-rata basis with the other parties.
Horndrift and Cornerford Limited each hold a 25.2% share of certain beneficial
interests in a property trust arrangement that holds a portfolio of 26
Sainsbury's supermarket properties funded by bonds which matured in 2023 (the
"Structure"). Rental surpluses generated by the Structure are required to be
applied in the repayment of the bonds and not therefore capable of being
transferred to the joint venture or Group until those bonds have been repaid.
On 12 January 2023, the Group purchased British Airways Pension Trustees
Limited's (BAPTL) 50% interest in the joint venture for £188.8 million which
resulted in the Group consolidating the following entities:
Entity Address and principal Ownership
place of business
Jersey Third Floor, Liberation 100%
Horner (Jersey) LP House, Castle Street, St Helier, Jersey, owned by the Group
JE1 2LH
Horner GP Third Floor, Liberation 100%
House, Castle Street, St Helier, Jersey, owned by the Group
JE1 2LH
Horner REIT Limited Third Floor, Liberation 100%
House, Castle Street, St Helier, Jersey, owned by Horner (Jersey) LP
JE1 2LH
United Kingdom Langham Hall UK LLP, Previously owned 100% by Horner REIT Limited and disposed in March-23
Horndrift Limited 1 Fleet Street, London, E4M 7RA
Cornerford Limited Langham Hall UK LLP, Previously owned 100% by Horner REIT Limited and disposed in March-23
1 Fleet Street, London, E4M 7RA
The assets and liabilities recognised on acquisition were as follows:
Fair value
12 Jan 2023
£'000
Current assets
Investment in joint venture 200,887
Cash and cash equivalents 565
Trade and other receivables 19
Total current assets 201,471
Total assets 201,471
Current liabilities
Trade and other payables (9,078)
Total current liabilities (9,078)
Total liabilities (9,078)
Net assets 192,393
Negative goodwill on acquisition (3,565)
Purchase consideration 188,828
Transaction related costs of £451,000 were incurred in respect of the above
acquisition and were capitalised as part of the Group's carrying amount in the
joint venture.
Horner (Jersey) LP's share of the aggregate amounts recognised in the
statement of financial position of the Structure are as follows:
Fair value
12 Jan 2023
£'000
Non-current assets
Investment properties -
Total non-current assets -
Current assets
Contractual receivable 277,379
Trade and other receivables 1,683
Investment properties held for sale 16,888
Cash and cash equivalents -
Total current assets 295,950
Total assets 295,950
Current liabilities
Debt securities in issue (85,349)
Interest rate derivative (351)
Deferred tax (139)
Trade and other payables (4,097)
Other liabilities (5,127)
Total current liabilities (95,063)
Total liabilities (95,063)
Net assets 200,887
The acquisition of BAPTL's 50% interest in the joint venture, increased the
Group's beneficial interest in the structure to 51%. Following the additional
joint venture interest acquired during the year, the Group was deemed to
control the Structure jointly, as any change to the contractual arrangements
and deeds that regulate the Structure, required unanimous consent from all
beneficial holders. Therefore, the equity method of accounting continued to be
used until the disposal of the investment in joint venture which occurred
during the year. Further detail is included in Note 2 of the financial
information.
Atrato Halliwell Limited, affiliate of the Investment Adviser, has a carried
interest entitlement over the investment returns from the Group's investment
in the joint venture. Under the terms of the Limited Partnership Agreement,
("LPA"), once the Group and BAPTL received a return equal to their total
investment in the joint venture plus an amount equivalent to a 10% per annum
preferred return on that investment, Atrato Halliwell is entitled to share in
any further cash returns to be distributed by the joint venture. Atrato
Halliwell's entitlement to share in cash returns in excess of the preferred
return increases depending on the extent of those cash returns, up to a
maximum entitlement of £15,000,000.
Following the acquisition of BAPTL's 50% interest in the joint venture,
BAPTL's £7.5 million share of carried interest to Atrato Halliwell
crystalised and was paid at the point of acquisition, together with other
deferred arrangement fees payable by BAPTL amounting to £0.6 million. The
remaining £7.5 million is included within trade and other payables within
Note 18 and was paid after the year end.
On 13 March 2023, the Group sold its interests in Horndrift and Cornerford
Limited to Sainsbury's for gross proceeds of £430.8 million. which was
structured in three separate tranches:
- The first tranche of £279.3 million was paid in cash on 17 March
2023
- The second tranche of £116.9 million was paid in cash after the
balance sheet date on 10 July 2023
- The third tranche of £34.7 million was conditional on the sale of
the remaining five stores in the portfolio.
During the year, the Group purchased two of the five stores for a gross
purchase price of £25.2 million and received total proceeds from Sainsbury's
of £15.0 million.
After the year end, the Group purchased two of the remaining three stores in
the portfolio for a gross purchase price of £36.4 million and received
proceeds from Sainsbury's of £18.2 million. It is expected that the one
remaining store will be sold at vacant possession value.
Year to Year to
30 June 2023 30 June 2022
£'000 £'000
Total disposal consideration 430,797 -
Fair value adjustment to contractual receivable (2,579) -
Carrying amount of net assets sold (407,029) -
Transaction related costs (1,249) -
Profit on disposal of joint venture interest 19,940 -
Horndrift and Cornerford Limited's share of the aggregate amounts recognised
in the consolidated statement of comprehensive income and statement of
financial position for the period ending 13 March 2023 are as follows:
Period to Year to
13 March 2023
30 June 2022
£'000
£'000
Rental income 3,904 12,878
Finance income 18,142 15,988
Administrative and other expenses (1,844) (190)
Change in fair value of investment properties (4,256) (11,336)
Gain on disposal of investment properties 27,228 84,095
Operating profit 43,174 101,435
Finance expense (1,585) (1,996)
Profit before taxation 41,589 99,439
Tax charge for the period 833 (1,974)
Profit for the period/year 42,422 97,465
Group share of profit for the period / year 23,232 43,301
As at As at
13 March 2023
30 June 2022
£'000 £'000
Non-current assets
Investment properties - 37,005
Total non-current assets - 37,005
Current assets
Contractual receivable 559,268 530,481
Trade and other receivables 8,743 2,897
Investment properties held for sale 33,794 -
Cash and cash equivalents - -
Total current assets 601,805 533,378
Total assets 601,805 570,383
Current liabilities
Debt securities in issue 169,901 176,243
Interest rate derivative 467 3,451
Deferred tax 353 4,196
Other liabilities 10,259 9,883
Trade and other payables 10,231 7,329
Total current liabilities 191,211 201,102
Total liabilities 191,211 201,102
Net assets 410,594 369,281
Negative goodwill on acquisition (3,565) -
Carrying amount of net assets at disposal 407,029 369,281
15. Financial assets held at fair value through profit or loss
Rental guarantees provided by the seller of an investment property are
recognised as a financial asset when there is a valid expectation that the
Group will utilise the guarantee over the contractual term. Rental guarantees
are classified as financial assets at fair value through profit and loss in
accordance with IFRS 9.
In determining the fair value of the rental guarantee, the Group makes an
assessment of the expected future cash flows to be derived over the term of
the rental guarantee and discounts these at the market rate. A review is
performed on a periodic basis based on payments received and changes in the
estimation of future cash flows.
The fair value of rental guarantees held by the Group are as follows:
Year to 30 June 2023 Year to
£'000 30 June 2022
£'000
At start of year 283 237
Additions 1,000 283
Fair value changes (including changes in estimated cash flows) 92 (326)
Collected during the year (1,375) 89
Total financial assets held at fair value through profit and loss - 283
at end of year
16. Financial assets held at amortised cost
Year to 30 June 2023 £'000 Year to
30 June 2022
£'000
At start of year 10,626 -
Additions - 10,626
Interest income recognised in profit and loss (note 8) 483 -
Lease payments received during the period (290) -
At end of period 10,819 10,626
On 8 June 2022, the Group acquired an Asda store in Carcroft, via a sale and
leaseback transaction for £10.6 million, this has been recognised in the
Statement of Financial Position as a Financial asset in accordance with IFRS
9. The financial asset is measured using the amortised cost model, which
recognises the rental payments as financial income and reductions of the asset
value based on the implicit interest rate in the lease. As at 30 June 2023 the
market value of the property was estimated at £7.2 million.
The Group applies the IFRS 9 simplified approach to measuring expected credit
losses using a lifetime expected credit loss provision for trade receivables.
To measure expected credit losses on a collective basis, trade receivables are
grouped based on similar credit risk and ageing. The expected loss rates are
based on the Group's historical credit losses experienced over the period from
incorporation to 30 June 2023. The historical loss rates are then adjusted for
current and forward-looking information on macro-economic factors affecting
the Group's customers. Both the expected credit loss provision and the
incurred loss provision in the current year is immaterial. No reasonable
possible changes in the assumptions underpinning the expected credit loss
provision would give rise to a material expected credit loss.
17. Trade and other receivables
As at As at
30 June 2023 £'000 30 June 2022
£'000
Other receivables 4,723 1,430
Receivable from joint venture disposal 136,582 -
Prepayments and accrued income 850 433
Total trade and other receivables 142,155 1,863
The Group applies the IFRS 9 simplified approach to measuring expected credit
losses using a lifetime expected credit loss provision for trade receivables.
To measure expected credit losses on a collective basis, trade receivables are
grouped based on similar credit risk and ageing. The expected loss rates are
based on the Group's historical credit losses experienced over the period from
incorporation to 30 June 2023. The historical loss rates are then adjusted for
current and forward-looking information on macro-economic factors affecting
the Group's customers. Both the expected credit loss provision and the
incurred loss provision in the current and prior year are immaterial. No
reasonable possible changes in the assumptions underpinning the expected
credit loss provision would give rise to a material expected credit loss.
The receivable following the disposal of the Joint venture receivable has been
initially recognised at fair value which resulted in a discount of £2.6
million to the gross amounts to be received of £136.6 million and which is
being amortised and recognised within finance income over the period to the
receipt of cash from Sainsbury's. £135.1 million was received post year end
and the remainder of the consideration is expected to be received on sale of
the final property.
18. Trade and other payables
As at As at
30 June 2023 £'000 30 June 2022
£'000
Corporate accruals 22,469 8,958
VAT payable 4,510 1,719
Total trade and other payables 26,979 10,677
19. Interest rate derivatives
As at As at
30 June 2023 £'000 30 June 2022
£'000
Non-current asset: Interest rate swaps 35,601 5,114
Non-current asset: Interest rate cap 1,597 -
Current Asset: Interest rate swaps 16,800 -
Current Asset: Interest rate cap 3,584 -
The rate swaps are remeasured to fair value by the counterparty bank on a
quarterly basis.
The fair value at the end of year comprises: Year to 30 June 2023 £'000 Year to
30 June 2022
£'000
At start of year (net) 5,114 (447)
Interest rate derivative premium paid on inception 44,255 -
Amortisation of cap premium in the period (note 8) - (5)
Disposal of interest rate derivatives (2,878) -
Changes in fair value of interest rate derivative in the year (P&L) 19,695 5,270
Changes in fair value of interest rate derivative in the year (OCI) 3,111 -
(Credit)/Charge to the income statement (P&L) (note 8) (9,671) -
(Credit)/Charge to the income statement (OCI) (note 8) (2,043) 296
Fair value at end of year (net) 57,583 5,114
To partially mitigate the interest rate risk that arises as a result of
entering into the floating rate debt facilities referred to in note 21, the
Group has entered into derivative interest rate swaps in relation to the drawn
Unsecured bank syndicate facilities ('the Unsecured swaps') and loan
facilities with Bayerische Landesbank ('the BLB swaps') and Wells Fargo
Bank ('the Wells swaps'). The Group has also entered into a derivative
interest rate cap in relation to the drawn HSBC loan facility ('the HSBC
cap').
A summary of these derivatives as at 30 June 2023 are shown in the table
below:
Issuer Derivative Type Notional amount £m Mark to Market 30 June 2023 Swap Rate Maturity Date
Premium Paid £m
Barclays Interest Rate Swap £250.0 £26.7 £33.5 1.34% Jul-27
Barclays Interest Rate Swap £100.0 £7.6 £8.5 1.34% Jul-25
Barclays Interest Rate Swap £30.6 £1.2 £0.7 1.34% Dec-23
HSBC Interest Rate Cap £96.5 £6.0 £5.2 1.12% Aug-24
BLB Interest Rate Swap £37.3 £1.2 £2.7 2.64% Mar-26
BLB Interest Rate Swap £22.2 £0.7 £1.6 2.64% Mar-26
BLB Interest Rate Swap £27.4 £0.9 £2.0 2.64% Mar-26
Wells Fargo Interest Rate Swap £30.0 - £3.3 0.19% Jul-25
Total £594.0 £44.3 £57.5 - -
On 21 March 2023, the Group announced the refinancing of the existing loan
facilities with Bayerische Landesbank with a new three-year £86.9 million
term loan replacing the existing tranches of the same amount. The Group closed
out swaps on the same date as these coincided with the previous facility. The
Group made a profit on disposal of £2.9 million on the swaps.
100% of the Group's outstanding debt as at 30 June 2023 was hedged through the
use of fixed rate debt or financial instruments as at 30 June 2023 (2022:
61%). It is the Group's target to hedge at least 50% of the Group's total debt
at any time using fixed rate loans or interest rate derivatives.
The derivatives have been valued in accordance with IFRS 13 by reference to
interbank bid market rates as at the close of business on the last working day
prior to each reporting date. The fair values
are calculated using the present values of future cash flows, based on market
forecasts of interest rates and adjusted for the credit risk of the
counterparties. The amounts and timing of future cash flows are projected on
the basis of the contractual terms.
All interest rate derivatives are classified as level 2 in the fair value
hierarchy as defined under IFRS 13 and there were no transfers to or from
other levels of the fair value hierarchy during the year.
In accordance with the Group's treasury risk policy, the Group applies cash
flow hedge accounting in partially hedging the interest rate risks arising on
its Wells Fargo variable rate linked facility. Since the refinancing of the
Bayerische Landesbank loan facility the Group no longer applies hedge
accounting to the newly acquired swaps. Changes in the fair values of
derivatives that are designated as cash flow hedges and are effective are
recognised directly in the cash flow hedge reserve and included in other
comprehensive income. Any ineffectiveness that may arise in this hedge
relationship will be included in profit or loss.
All floating rate loans and interest rate derivatives are contractually linked
to the Sterling Overnight Index Average ("SONIA").
Post year end, the Group extended the maturity of the interest rate
derivatives by 12 months. The weighted average interest rate following the
derivative changes is 3.1% inclusive of the margin. The Group also entered
into a forward starting cap starting in August 2024 and terminating in July
2025 with a strike rate of 1.4%.
20. Bank borrowings
Amounts falling due within one year: As at As at
30 June 2023 £'000 30 June 2022
£'000
Secured debt - -
Unsecured debt 62,090 -
Less: Unamortised finance costs (234) -
Bank borrowings per the consolidated statement of financial position 61,856 -
Amounts falling due after more than one year:
Secured debt 291,551 352,213
Unsecured debt 318,508 -
Less: Unamortised finance costs (4,450) (3,667)
Bank borrowings per the consolidated statement of financial position 605,609 348,546
Total bank borrowings 667,465 348,546
A summary of the Group's borrowing facilities as at 30 June 2023 are shown
below:
Lender Facility Expiry Credit margin Variable/hedged Loan commitment £m Amount drawn 30 June 2023 £m
Expiry*
HSBC Revolving credit facility Aug 2024 Aug 2025 1.65% Cap - 1.12% £96.5 £78.1
HSBC Revolving credit facility Aug 2024 Aug 2025 1.65% SONIA £3.5 NIL
HSBC Revolving credit facility Aug 2024 Aug 2025 1.75% SONIA £50.0 NIL
Deka Term Loan Aug 2024 Aug 2026 1.35% 0.54% £47.6 £47.6
Deka Term Loan Aug 2024 Aug 2026 1.35% 0.70% £28.9 £28.9
Deka Term Loan Aug 2024 Aug 2026 1.40% 0.32% £20.0 £20.0
BLB Term Loan Mar 2026 Mar 2026 1.65% SWAP - 2.64% £86.9 £86.9
Wells Fargo Revolving credit facility Jul 2025 Jul 2027 2.00% SWAP - 0.18% £30.0 £30.0
Wells Fargo Revolving credit facility Jul 2025 Jul 2027 2.00% SONIA £9.0 NIL
Barclays Revolving credit facility Jan 2024 Jan 2026 1.50% SONIA £77.5 NIL
Syndicate Unsecured RCF Jul 2027 Jul 2029 1.50% SWAP - 1.34% £250.0 £218.5
Syndicate Unsecured Term Loan Jul 2025 Jul 2027 1.50% SWAP - 1.34% £100.0 £100.0
Syndicate Unsecured Term Loan Jan 2024 Jan 2025 1.50% SWAP - 1.34% £30.6 £30.6
Syndicate Unsecured Term Loan Jan 2024 Jan 2025 1.50% SONIA £31.5 £31.5
Total £862.0 £672.1
*Includes extension options that can be utilised following approval from all
parties
In July 2022, the Group announced the arrangement of a new £412.1 million
unsecured credit facility with a bank syndicate comprising Barclays, Royal
Bank of Canada, Wells Fargo and Royal Bank of Scotland International as
summarised above. This was partially used to reduce the Wells Fargo and and
Barclays/RBC facilities. This led to loan modifications under IFRS 9 resulting
in an acceleration of loan arrangement fees of £1.52 million.
In January 2023, the Group entered into a short-term debt facility provided by
J.P. Morgan of £196.5 million to fund the acquisition of the additional
interest in the Joint Venture. The Facility had a margin of 1.5% over SONIA
and an arrangement fee of 2.0%. This facility was repaid in March 2023.
The Group has been in compliance with all of the financial covenants across
the Group's bank facilities as applicable throughout the periods covered by
this financial information.
Any associated fees in arranging the bank borrowings that are unamortised as
at the end of the year are offset against amounts drawn under the facility as
shown in the table above. The debt is secured
by charges over the Group's investment properties and by charges over the
shares of certain Group undertakings, not including the Company itself. There
have been no defaults of breaches of any loan covenants during the current
year or any prior period.
The Group's borrowings carried at amortised cost are considered to be
approximate to their fair value.
Post year end, the Group reduced the HSBC facility to £50.0 million from
£150.0 million, cancelled the Barclays/RBC facility and Unsecured term loan
of £77.5 million and £62.1 million respectively and entered into a new
£67.0 million facility with SMBC Bank International PLC, for more information
see note 28.
21. Categories of financial instruments
As at As at
30 June 2023 £'000 30 June 2022
£'000
Financial assets
Financial assets at amortised cost:
Lease Receivables 10,819 10,626
Cash and cash equivalents 37,481 51,200
Trade and other receivables 141,305 1,430
Financial assets at fair value:
Rent guarantees - 283
Interest rate derivative 54,278 -
Derivatives in effective hedges:
Interest rate derivative 3,304 5,114
Total financial assets 247,187 68,653
Financial liabilities
Financial liabilities at amortised cost:
Secured debt 289,736 348,546
Unsecured debt 377,729 -
Trade and other payables 22,469 8,958
Total financial liabilities 689,934 357,504
At the year end, all financial assets and liabilities were measured at
amortised cost except for the interest rate derivatives which are measured at
fair value. The interest rate derivative valuation is classified as 'level
2' in the fair value hierarchy as defined in IFRS 13 and its fair value was
calculated using the present values of future cash flows, based on market
forecasts of interest rates and adjusted for the credit risk of the
counterparties.
Financial risk management
Through the Group's operations and use of debt financing it is exposed to
certain risks. The Group's financial risk management objective is to minimise
the effect of these risks, for example by using interest rate cap and interest
rate swap derivatives to partially mitigate exposure to fluctuations in
interest rates, as described in note 19.
The exposure to each financial risk considered potentially material to the
Group, how it arises and the policy for managing it is summarised below.
Market risk
Market risk is defined as the risk that the fair value or future cash flows of
a financial instrument will fluctuate because of changes in market prices.
The Group's market risk arises from open positions in interest bearing
assets and liabilities, to the extent that these are exposed to general and
specific market movements.
The Group's interest-bearing financial instruments comprise cash and cash
equivalents and bank borrowings. Changes in market interest rates therefore
affect the Group's finance income and costs, although the Group has purchased
interest rate derivatives as described in note 19 in order to partially
mitigate the risk in respect of finance costs. The Group's sensitivity to
changes in interest rates, calculated on the basis of a ten-basis point
increase in the three-month SONIA daily rate, was as follows:
Year to Year to
30 June 2023 30 June 2022 £'000
£'000
Effect on profit (Increase)/decrease (1,383) 413
Effect on other comprehensive income and equity (increase) (58) (223)
Trade and other receivables and payables are interest free as long as they are
paid in accordance with their terms, and have payment terms of less than one
year, so it is assumed that there is no material interest rate risk associated
with these financial instruments.
The Group prepares its financial information in Sterling and all of its
current operations are Sterling denominated. It therefore has no exposure to
foreign currency and does not have any direct sensitivity to changes in
foreign currency exchange rates.
Inflation risk arises from the impact of inflation on the Group's income and
expenditure. The majority of the Group's passing rent at 30 June 2023 is
subject to inflation-linked rent reviews. Consequently, the Group is exposed
to movements in the Retail Prices Index ("RPI"), which is the relevant
inflation benchmark. However, all RPI-linked rent review provisions provide
those rents will only be subject to upwards review and never downwards. As a
result, the Group is not exposed to a fall in rent in deflationary conditions.
The Group does not expect inflation risk to have a material effect on the
Group's administrative expenses, with the exception of the investment advisory
fee which is determined as a function of the reported net asset value of the
Group.
Credit risk
Credit risk is the risk of financial loss to the Group if a counterparty fails
to meet its contractual obligations. The principal counterparties are the
Group's tenants (in respect of rent receivables arising under operating
leases) and banks (as holders of the Group's cash deposits).
The credit risk of rent receivables is considered low because the
counterparties to the operating leases are considered by the Board to be high
quality tenants and any lease guarantors are of appropriate financial
strength. Rent collection dates and statistics are monitored to identify any
problems at an early stage, and if necessary rigorous credit control
procedures will be applied to facilitate the recovery of rent receivables. The
credit risk on cash deposits is limited because the counterparties are banks
with credit ratings which are acceptable to the Board and are kept under
review each quarter.
The credit risk of the receivable from the disposal of the Joint Venture is
considered low and this is supported by the fact that the majority of this was
received shortly after the year end.
Liquidity risk
Liquidity risk arises from the Group's management of working capital and the
finance costs and principal repayments on its secured debt. It is the risk
that the Group will not be able to meet its financial obligations as they fall
due.
The Group seeks to manage its liquidity risk by ensuring that sufficient cash
is available to meet its foreseeable needs. These liquidity needs are
relatively modest and are capable of being satisfied by the surplus available
after rental receipts have been applied in payment of interest as required by
the credit agreement relating to the Group's secured debt.
Before entering into any financing arrangements, the Board assesses the
resources that are expected to be available to the Group to meet its
liabilities when they fall due. These assessments are made on the basis of
both base case and downside scenarios. The Group prepares detailed management
accounts which are reviewed by the Board at least quarterly to assess ongoing
liquidity requirements and compliance with loan covenants. The Board also
keeps under review the maturity profile of the Group's cash deposits in order
to have reasonable assurance that cash will be available for the settlement of
liabilities when they fall due.
The following table shows the maturity analysis for financial assets and
liabilities. The table has been drawn up based on the undiscounted cash flows
of non-derivative financial instruments, including future interest payments,
based on the earliest date on which the Group can be required to pay and
assuming that the SONIA daily rate remains at the 30 June 2023 rate. Interest
rate derivatives are shown at fair value and not at their gross undiscounted
amounts.
As at 30 June 2023 Less than one year £'000 One to two years £'000 Two to five years £'000 More than five years £'000 Total
£'000
Financial assets:
Cash and cash equivalents 37,481 - - - 37,481
Trade and other receivables 141,305 - - - 141,305
Amortised cost asset 290 290 908 74,930 76,418
Interest rate derivatives 20,384 20,564 16,635 - 57,583
Total financial assets 199,460 20,854 17,543 74,930 312,787
Financial liabilities:
Bank borrowings 81,545 94,080 549,575 - 725,200
Trade payables and other payables 22,469 - - - 22,469
Total financial liabilities 104,014 94,080 549,575 - 747,669
As at 30 June 2022 Less than one year £'000 One to two years £'000 Two to five years £'000 More than five years £'000 Total
£'000
Financial assets:
Cash and cash equivalents 51,200 - - - 51,200
Trade and other receivables 1,430 - - - 1,430
Amortised cost asset 290 290 870 76,415 77,865
Rent guarantees 283 - - - 283
Interest rate derivatives - 843 4,271 - 5,114
Total financial assets 53,203 1,133 5,141 76,415 135,892
Financial liabilities:
Bank borrowings 9,335 205,679 156,510 - 371,524
Trade payables and other payables 8,958 - - - 8,958
Interest rate derivatives - - - - -
Total financial liabilities 18,293 205,679 156,510 - 380,482
Capital risk management
The Board's primary objective when monitoring capital is to preserve the
Group's ability to continue as a going concern, while ensuring it remains
within its debt covenants so as to safeguard secured assets and avoid
financial penalties.
Bank borrowings on secured facilities are secured on the Group's property
portfolio by way of fixed charges over property assets and over the shares in
the property-owning subsidiaries and any intermediary holding companies of
those subsidiaries.
At 30 June 2023, the capital structure of the Group consisted of bank
borrowings (note 20), cash and cash equivalents, and equity attributable to
the Shareholders of the Company (comprising share capital, retained earnings
and the other reserves referred to in notes 22 and 23).
In managing the Group's capital structure, the Board considers the Group's
cost of capital. In order to maintain or adjust the capital structure, the
Group keeps under review the amount of any dividends or other returns to
Shareholders and monitors the extent to which the issue of new shares or the
realisation of assets may be required.
Reconciliation of financial liabilities relating to financing activities
Total bank borrowings £'000 Interest and commitment fees payable £'000 Interest rate derivatives £'000 Total
£'000
As at 1 July 2022 348,546 1,939 (5,114) 345,371
Cash flows:
Debt drawdowns in the year 912,114 - - 912,114
Debt repayments in the year (598,486) - - (598,486)
Interest and commitment fees paid - (24,116) - (24,116)
Loan arrangement fees paid (5,010) - - (5,010)
Interest rate premium paid - - (44,255) (44,255)
Interest rate derivative disposal - - 2,878 2,878
Non-cash movements:
Finance costs in the statement of comprehensive income 10,301 29,014 (22,806) 16,509
Fair value changes - - 11,714 11,714
As at 30 June 2023 667,465 6,837 (57,583) 616,719
As at 1 July 2021 409,684 1,634 447 411,765
Cash flows:
Debt drawdowns in the year 402,922 - - 402,922
Debt repayments in the year (464,029) - - (464,029)
Interest and commitment fees paid - (10,527) - (10,527)
Loan arrangement fees paid (2,188) - - (2,188)
Non-cash movements:
Finance costs in the statement of comprehensive income 2,157 10,832 5 12,994
Fair value changes - - (5,566) (5,566)
At 30 June 2022 348,546 1,939 (5,114) 345,371
Movements in respect to share capital are disclosed in note 22 below.
The interest and commitment fees payable are included within the corporate
accruals balance in note 18. Cash flow movements are included in the
consolidated statement of cash flows and the non-cash movements are included
in note 8. The movements in the interest rate derivative financial liabilities
can be found in note 19.
22. Share capital
Ordinary Shares Share capital £'000 Share premium reserve £'000 Capital reduction reserve Total
of 1 pence £'000 £'000
Number
As at 1 July 2022 1,239,868,420 12,399 494,174 778,859 1,285,432
Scrip Dividends issued and fully paid - 22 August 2022 1,898,161 19 2,316 - 2,335
Scrip Dividends issued and fully paid - 16 November 2022 866,474 9 869 - 878
Scrip Dividends issued and fully paid - 23 February 2023 729,198 7 721 - 728
Scrip Dividends issued and fully paid - 26 May 2023 2,876,932 28 2,395 - 2,423
Share issue costs - - (89) - (89)
Dividend paid in the period (note 11) - - - (74,328) (74,328)
As at 30 June 2023 1,246,239,185 12,462 500,386 704,531 1,217,379
As at 1 July 2021 810,720,168 8,107 778,859 - 786,966
Scrip Dividends issued and fully paid - 20 August 2021 300,468 3 348 - 351
Ordinary shares issued and fully paid - 22 October 2021 173,913,043 1,740 - 200,001
198,261
Scrip dividends issued and fully paid - 16 November 2021 500,750 5 578 - 583
Share premium cancelled during - - (778,859) 778,859 -
the year and transferred to
capital reduction reserve
Scrip dividends issued and fully paid - 25 February 2022 111,233 1 136 - 137
Ordinary shares issued and fully paid - 29 April 2022 253,492,160 2,535 304,191 - 306,726
Scrip dividends issued and fully paid - 27 May 2022 830,598 8 1,026 - 1,034
Share issue costs - - (10,366) - (10,366)
As at 30 June 2022 1,239,868,420 12,399 494,174 778,859 1,285,432
Share allotments and other movements in relation to the capital of the Company
in the year:
Scrip dividends were issued on 22 August 2022, 16 November 2022, 23 February
2023 and 26 May 2023 at a reference price of £1.23, £1.01, £1.00 and £0.84
per share respectively. The Company issued a combined total of 6,370,765
shares under the scrip dividend programme during the year. The consideration
received (net of share issue costs) in excess of the par value of the ordinary
shares issued of £6.3 million was credited to the share premium reserve.
Ordinary Shareholders are entitled to all dividends declared by the Company
and to all of the Company's assets after repayment of its borrowings and
ordinary creditors. Ordinary Shareholders have the right to vote at meetings
of the Company. All ordinary shares carry equal voting rights. The aggregate
ordinary shares in issue at 30 June 2023 total was 1.25 billion.
23. Reserves
The nature and purpose of each of the reserves included within equity at 30
June 2023 are as follows:
· Share premium reserve: represents the surplus of the gross proceeds of
share issues over the nominal value of the shares, net of the direct costs of
equity issues
· Cash flow hedge reserve: represents cumulative gains or losses, net of
tax, on effective cash flow hedging instruments
· Capital reduction reserve: represents a distributable reserve created
following a Court approved reduction in capital less dividends paid
· Retained earnings represent cumulative net gains and losses recognised
in the statement
of comprehensive income.
The only movements in these reserves during the year are disclosed in the
consolidated statement of changes in equity.
24. Capital commitments
The Group had no capital commitments outstanding as at 30 June 2023 and 30
June 2022.
25. Operating leases
The Group's principal assets are investment properties which are leased to
third parties under non-cancellable operating leases. The weighted average
remaining lease term at 30 June 2023 is 13.6 years (2022: 15.1 years). The
leases contain predominately fixed or inflation-linked uplifts.
The future minimum lease payments receivable under the Group's leases, are as
follows:
As at As at
30 June 2023 30 June 2022
£'000 £'000
Year 1 100,156 77,438
Year 2 98,941 77,831
Year 3 98,614 77,088
Year 4 97,552 76,861
Year 5 97,177 75,994
Year 6-10 452,219 375,951
Year 11-15 310,150 290,613
Year 16-20 94,875 127,574
Year 21-25 23,358 25,144
More than 25 years 12,743 14,846
Total 1,385,785 1,219,340
26. Net asset value per share
NAV per share is calculated by dividing the Group's net assets as shown in the
consolidated statement of financial position, by the number of ordinary shares
outstanding at the end of the year. As there are no dilutive instruments
outstanding, basic and diluted NAV per share are identical.
The European Public Real Estate Association (EPRA) publishes guidelines for
the calculation of three measures of NAV to enable consistent comparisons
between property companies, which were updated in the prior year and took
effect from 1 January 2020. The Group uses EPRA Net Tangible Assets ("EPRA
NTA") as the most meaningful measure of long-term performance and the measure
which is being adopted by the majority of UK REITs, establishing it as the
industry standard benchmark. It excludes items that are considered to have no
impact in the long-term, such as the fair value of derivatives.
NAV and EPRA NTA per share calculation are as follows:
As at As at
30 June 2023 30 June 2022
£'000 £'000
Net assets per the consolidated statement of financial position 1,217,726 1,432,455
Contractual fulfilment intangible assets - (93)
Fair value of financial assets at amortised cost (3,609) (666)
Fair value of interest rate derivatives (57,583) (5,114)
EPRA NTA 1,156,534 1,426,582
Ordinary shares in issue at 30 June 1,246,239,185 1,239,868,420
NAV per share - Basic and diluted (pence) 98p 116p
EPRA NTA per share (pence) 93p 115p
27. Transactions with related parties
Details of the related parties to the Group in the year and the transactions
with these related parties were as follows:
a. Directors
Directors' fees
Nick Hewson, Chair of the Board of Directors of the Company, is paid fees of
£75,000 per annum, with the other Directors each being paid fees of £52,500
per annum. Jon Austen is paid an additional £9,000 per annum for his role as
chair of the Company's Audit Committee, Vince Prior is paid an additional
£4,000 per annum for his role as chair of the Company's Nomination Committee
and £5,000 for his role as Senior Independent Director. Cathryn Vanderspar is
paid an additional £5,000 for her role as Chair of the Remuneration
Committee. Frances Davies is paid an additional £5,000 for her role as Chair
of the ESG Committee.
The total remuneration payable to the Directors in respect of the current year
and previous year are disclosed in note 7.
Directors' interests
Details of the direct and indirect interests of the Directors and their close
families in the ordinary shares of one pence each in the Company at 30 June
2023 were as follows:
· Nick Hewson: 1,263,309 shares (0.11% of issued share capital)
· Jon Austen: 305,339 shares (0.02% of issued share capital)
· Vince Prior: 213,432 shares (0.02% of issued share capital)
· Cathryn Vanderspar: 125,802 (0.01% of issued share capital)
· Frances Davies: 24,774 (0.00% of issued share capital)
· Sapna Shah: 28,951 (0.00% of issued share capital)
Details of the direct and indirect interest of the Directors and their close
families in the ordinary shares of one pence each in the Company at the date
of signing the accounts were as follows:
· Nick Hewson: 1,263,309 shares (0.11% of issued share capital)
· Jon Austen: 305,339 shares (0.02% of issued share capital)
· Vince Prior: 213,432 shares (0.02% of issued share capital)
· Cathryn Vanderspar: 125,802 (0.01% of issued share capital)
· Frances Davies: 36,774 (0.00% of issued share capital)
· Sapna Shah: 28,951 (0.00% of issued share capital)
b. Investment Adviser
Investment advisory and accounting fees
The investment adviser to the Group, Atrato Capital Limited (the Investment
Adviser), is entitled to certain advisory fees under the terms of the
Investment Advisory Agreement (the 'Agreement') dated 14 July 2021.
The entitlement of the Investment Adviser to advisory fees is by way of what
are termed 'Monthly Management Fees' and 'Semi-Annual Management Fees' both of
which are calculated by reference to the net asset value of the Group at
particular dates, as adjusted for the financial impact of certain investment
events and after deducting any uninvested proceeds from share issues up to the
date of the calculation of the relevant fee (these adjusted amounts are
referred to as 'Adjusted Net Asset Value' for the purpose of calculation of
the fees in accordance with the Agreement).
Until the Adjusted Net Value of the Group exceeds £1,500 million, the
entitlements to advisory fees can be summarised as follows:
· Monthly Management Fee payable monthly in arrears: 1/12th of 0.7125% per
calendar month of Adjusted Net Asset Value up to or equal to £500 million,
1/12th of 0.5625% per calendar month of Adjusted Net Asset Value above £500
million and up to or equal to £1,000 million and 1/12(th) of 0.4875% per
calendar month of Adjusted Net Asset Value above £1,000 and up to or equal to
£1,500 million.
· Semi-Annual Management Fee payable semi-annually in arrears: 0.11875% of
Adjusted Net Asset Value up to or equal to £500 million, 0.09375% of Adjusted
Net Asset Value above £500 million and up to or equal to £1,000 million and
0.08125% of Adjusted Net Asset Value above £1,000 million and up to or equal
to £1,500 million.
For the year to 30 June 2023 the total advisory fees payable to the Investment
Adviser were £10,292,302 (2022: £9,404,938) of which £1,845,144 (2022:
£1,446,246) is included in trade and other payables in the consolidated
statement of financial position.
The Investment Adviser is also entitled to an annual accounting and
administration service fee equal to: £52,788; plus (i) £4,279 for any
indirect subsidiary of the Company and (ii) £1,661 for each direct subsidiary
of the Company. A full list of the Company and its direct and indirect
subsidiary undertakings is listed in Note 13 of this financial information.
For the year to 30 June 2023 the total accounting and administration service
fee payable to the Investment Adviser was £297,475 (2022: £237,559) of which
£83,614 (2022: £81,833) is included in trade and other payables in the
consolidated statement of financial position.
Introducer Services
Atrato Partners, an affiliate of the Investment Adviser, is entitled to fees
in relation to the successful introduction of prospective investors in
connection with subscriptions for ordinary share capital in
the Company.
The entitlement of the Investment Adviser to introducer fees is by fees and/or
commission which can be summarised as follows:
· Commission basis: 1% of total subscription in respect of ordinary shares
subscribed for
by any prospective investor introduced by Atrato Partners.
For the year to 30 June 2023 the total introducer fees payable to the
affiliate of the Investment Adviser were £nil (2022: £271,239).
Interest in shares of the Company
Details of the direct and indirect interests of the Directors of the
Investment Adviser and their close families in the ordinary shares of one
pence each in the Company at 30 June 2023 were as follows:
· Ben Green: 1,876,376 shares (0.15% of issued share capital)
· Steve Windsor: 1,698,928 shares (0.14% of issued share capital)
· Steven Noble: 232,255 shares (0.02% of issued share capital)
· Natalie Markham: 62,679 shares (0.01% of issued share capital)
Carried interest held in the Group's joint venture
Under the terms of the Horner (Jersey) LP (the "JV") Limited Partnership
Agreement ("LPA"), an affiliate of the Investment Adviser, Atrato Halliwell
Limited (the "Carry Partner"), had a carried interest entitlement over the
investment returns from the JV's investment in the Structure. Further details
regarding the estimated value of the Carry Partner's interest in the JV are
included in note 14.
Carried interest payments are only payable to the extent that distributions
are made from the JV to the Group. On the acquisition of the additional Joint
Venture interest during the year, the carried interest was considered to have
crystalised and became payable. £7.5 million was paid in relation to the
settlement of the carry interest of the additional joint venture interest
acquired during the year and was recognised as a financing cashflow within the
cashflow statement. The existing interest of £7.5 million payable is included
in corporate accruals within Note 18 and was settled subsequent to the year
end.
c. Other related parties
During the year, SUPR Green Energy Limited received a credit note from Evo
Energy Limited for solar panels purchased in June 2021 of £155,142.52. These
panels that were being held by Evo Energy Limited were sold to Sonne Solar
Limited, a subsidiary of Atrato Onsite Energy PLC, a company is advised by
an affiliate of the Investment Adviser. As 30 June 2023, the balance was still
outstanding, and was received in cash after the year end.
28. Subsequent events
Debt financing
· In July 2023, the Group cancelled its 62.1 million unsecured term loan
with the unsecured banking syndicate.
· In September 2023, the Group announced that its £150.0 million
revolving credit facility with HSBC was refinanced with a new £50.0 million,
secured three-year RCF with a £75 million accordion option. The new facility
has two one-year extension options and a margin of 170 bps over SONIA.
· In September 2023, the Group announced the cancellation of the
Barclays/RBC facility of £77.5 million.
· In September 2023, the Group announced the arrangement of a new £67.0
million unsecured term loan facility with SMBC Bank International PLC at a
margin of 1.4% over SONIA. The term of the loan is for three-years with two
further one-year extension options.
· In September 2023, the Group extended £50.0 million of its £100.0
million unsecured term loan with the unsecured banking syndicate by one year
to July 2026.
Hedging
· In September 2023, the Group adjusted its interest rate derivatives
held at the year end to extend the maturity of the derivatives by 12 months.
The Group's drawn debt is fully hedged at an interest rate of 3.1% (including
margin) with a weighted average term of 4 years (including extension options).
Acquisitions
· In July 2023, the Group announced the acquisition of two Sainsbury's
stores from the SRP for £36.4 million (excluding acquisition costs).
Sainsbury's entered into new 15-year leases on these stores with five yearly
open market rent reviews and a tenant break option at year ten.
UNAUDITED SUPPLEMENTARY INFORMATION
Notes to EPRA and other Key Performance Indicators
1. EPRA Earnings and Adjusted Earnings per Share
For the period from 1 July 2022 to 30 June 2023 Net profit attributable Weighted average number of ordinary shares(1) Earnings/
to ordinary Shareholders
Number per share
£'000
Pence
Net (loss)/profit attributable to ordinary Shareholders (144,866) 1,242,574,505 (11.7)
Adjustments to remove:
Changes in fair value of investment properties and associated rent guarantees 256,066 - 20.6
Changes in fair value of interest rate derivatives measured at FVTPL (10,024) - (0.8)
Profit on disposal of interest rate derivatives (2,878) - (0.2)
Group share of changes in fair value of joint venture investment properties (11,486) - (0.9)
Profit on disposal of groups interest in joint venture (19,940) - (1.6)
Finance income received on interest rate derivatives held at fair value (9,671) - (0.8)
through profit and loss
EPRA earnings 57,201 1,242,574,505 4.6
Add finance income received on interest rate derivatives held at fair value 9,671 - 0.8
through profit and loss
Add accelerated finance costs 1,518 - 0.1
Add Joint Venture acquisition loan arrangement fee 4,009 - 0.3
Adjusted EPRA earnings 72,399 1,242,574,505 5.8
1 Based on the weighted average number of ordinary shares in issue in the
year ended 30 June 2023.
For the period from 1 July 2021 to 30 June 2022 Net profit attributable Weighted average number of ordinary shares(1) Earnings/
to ordinary Shareholders
Number per share
£'000
Pence
Net profit attributable to ordinary Shareholders 115,869 975,233,858 11.9p
Adjustments to remove:
Changes in fair value of interest rate derivatives (5,566) - (0.6p)
Changes in fair value of investment properties and associated rent guarantees (21,820) - (2.2p)
Group share of changes in fair value of joint venture investment properties 6,021 - 0.6p
Group share of negative goodwill from joint venture investment (37,102) - (3.8p)
EPRA EPS 57,402 975,233,858 5.9p
2 Based on the weighted average number of ordinary shares in issue in the
year ended 30 June 2022.
2. EPRA NTA per share
EPRA NTA is considered to be the most relevant measure for the Group and is
now the primary measure of net assets, replacing the previously reported EPRA
Net Asset Value metric. For the current period EPRA NTA is calculated as net
assets per the consolidated statement of financial position excluding the fair
value of interest rate derivatives.
30 June 2023 EPRA NTA EPRA NRV EPRA NDV £'000
£'000 £'000
IFRS NAV attributable to ordinary Shareholders 1,217,726 1,217,726 1,217,726
Fair value of Financial asset held at amortised cost (3,609) (3,609) (3,609)
Fair value of interest rate derivatives (57,583) (57,583) -
Intangibles - - -
Purchasers' costs - 122,990 -
Fair value of debt - - 4,876
EPRA metric 1,156,534 1,279,524 1,218,993
EPRA metric per share 93p 103p 98p
30 June 2022 EPRA NTA EPRA NRV EPRA NDV £'000
£'000 £'000
IFRS NAV attributable to ordinary Shareholders 1,432,455 1,432,455 1,432,455
Fair value of interest rate derivatives (5,114) (5,114) -
Fair value of Financial asset held at amortised cost (666) (666) (666)
Intangibles (93) - -
Purchasers' costs - 113,935 -
Fair value of debt - - 4,320
EPRA metric 1,426,582 1,540,610 1,436,109
EPRA metric per share 115p 124p 116p
3. EPRA Net Initial Yield (NIY) and EPRA "topped up" NIY
As at As at
30 June 2023 £'000 30 June 2022 £'000
Investment Property - wholly owned (note 12) 1,685,690 1,561,590
Investment Property - share of joint ventures - 266,500
Completed Property Portfolio 1,685,690 1,828,090
Allowance for estimated purchasers' costs 122,990 133,380
Grossed up completed property portfolio valuation (B) 1,808,680 1,961,470
Annualised passing rental income - wholly owned 99,910 77,230
Annualised passing rental income - share of joint venture - 13,372
Annualised non-recoverable property outgoings (1,117) (400)
Less: contracted rent under rent free periods - -
Annualised net rents (A) 98,793 90,202
Rent expiration of rent-free periods and fixed uplifts 447 56
Topped up annualised net rents (C) 99,240 90,258
EPRA NIY (A/B) 5.46% 4.60%
EPRA "topped up" NIY (C/B) 5.49% 4.60%
All rent free periods expire within the year to 30 June 2024
4. EPRA Vacancy Rate
EPRA Vacancy Rate As at As at
30 June 2023 £'000 30 June 2022 £'000
Estimated rental value of vacant space 439 188
Estimated rental value of the whole portfolio 100,797 77,237
EPRA Vacancy Rate 0.4% 0.2%
The EPRA vacancy rate is calculated as the ERV of the unrented, lettable space
as a proportion of the total rental value of the direct Investment Property
portfolio. This is expected to continue to be a highly immaterial percentage
as the majority of the portfolio is let to the largest supermarket operators
in the UK.
5. EPRA Cost Ratio
As at As at
30 June 2023 £'000 30 June 2022 £'000
Administration expenses per IFRS 15,429 13,937
Service charge income (5,939) (2,086)
Service charge costs 6,518 2,338
Net Service charge costs 579 252
Share of joint venture expenses 938 95
Total costs (including direct vacant property costs) (A) 16,946 14,284
Vacant property costs (328) (99)
Total costs (excluding direct vacant property costs) (B) 16,618 14,185
Gross rental income per IFRS 95,823 72,363
Less: service charge components of gross rental income - -
Add: Share of Gross rental income from Joint Ventures 13,529 14,423
Gross rental income (C) 109,352 86,786
EPRA Cost ratio (including direct vacant property costs) (A/C) 15.50% 16.46%
EPRA Cost ratio (excluding vacant property costs) (B/C) 15.20% 16.34%
1. The Company does not have any overhead costs capitalised as it has no
assets under development.
6. EPRA LTV
The Group voluntarily adopted the EPRA issued new best practice reporting
guidelines in the year ending 30 June 2023, incorporating the new measure of
loan to value: EPRA Loan-to-Value (EPRA LTV) and is defined as net debt
divided by total property market value.
The table below illustrates the reconciliation of the numbers under the new
measures, where prior year comparative figures have also been restated in line
with the new EPRA methodology.
As at As at
30 June 2023 30 June 2022
£'000 £'000
Group Net Debt
Borrowings from financial institutions 667,465 348,546
Net payables - 24,893
Less: Cash and cash equivalents (37,481) (51,200)
Group Net Debt Total (A) 629,984 322,239
Group Property Value
Investment properties at fair value 1,685,690 1,561,590
Intangibles - 93
Net receivables 93,620 -
Financial assets 10,819 10,626
Total Group Property Value (B) 1,790,129 1,572,309
Group LTV (A-B) 35.19% 20.49%
Share of Joint Ventures Debt
Bond loans - 88,121
Net payables - 822
JV Net Debt Total (A) - 88,943
Group Property Value
Owner-occupied property
Investment properties at fair value - 277,407
Total JV Property Value (B) - 277,407
JV LTV (A-B) 0.00% 32.06%
Combined Net Debt (A) 629,984 411,182
Combined Property Value (B) 1,790,129 1,849,717
Combined LTV (A-B) 35.19% 22.23%
7. EPRA Like-for-Like Rental Growth
Sector Year ended 30 June 2023 Year ended 30 June 2022 Like-for-Like rental growth
£'000 £'000 %
UK 62,688 61,059 2.7%
The like-for-like rental growth is based on changes in net rental income for
those properties which have been held for the duration of both the current and
comparative reporting. This represents a portfolio valuation, as assessed by
the valuer of £ 1.03 billion (30 June 2022: £1.19 billion).
8. EPRA Property Related Capital Expenditure
As at As at
30 June 2023 30 June 2022
£'000 £'000
Group
Acquisitions 377,311 388,696
Development
Investment properties
Group Total CapEx 377,311 388,696
Joint Venture
Acquisitions - -
Development - -
Investment properties - -
Joint Venture CapEx - -
Total CapEx 377,311 388,696
Acquisitions relate to purchase of investment properties in the year and
includes capitalised acquisition costs. There has been no capital expenditure
on the investment properties within the portfolio and no capitalised
development expenditure has been incurred in the year or prior year.
9. Total Shareholder Return
Total Shareholder Return Year to Year to
30 June 2023 Pence per share ('p') 30 June 2022 Pence per share ('p')
Share price at start of the year 119.50 117.50
Share price at the end of the year 73.00 119.50
Increase in share price (46.50) 2.00
Dividends declared for the year 6.00 5.94
Increase in share price plus dividends (40.50) 7.94
Share price at start of year 119.50 117.50
Total Shareholder Return (34%) 7%
10. Net loan to value ratio
The proportion of our gross asset value that is funded by borrowings
calculated as statement of financial position borrowings less cash balances
divided by total investment properties valuation.
Net loan to value As at As at
30 June 2023 £'000 30 June 2022 £'000
Bank borrowings 667,465 348,546
Less cash and cash equivalents (37,481) (51,200)
Net borrowings 629,984 297,346
Investment properties valuation 1,685,690 1,561,590
Net loan to value ratio 37% 19%
11. Annualised passing rent
Annualised passing rent is the annualised cash rental income being received as
at the stated date.
GLOSSARY
AGM Annual General Meeting
AIFMD Alternative Investment Fund Managers Directive
Direct Portfolio Wholly Owned Properties held by the Group
EPRA European Public Real Estate Association
EPS Earnings per share, calculated as the profit for the period after tax
attributable to members of the parent company divided by the weighted average
number of shares in issue in the period
FRI A lease granted on an FRI basis means that all repairing and insuring
obligations are imposed on the tenant, relieving the landlord from all
liability for the cost of insurance and repairs
IFRS UK adopted accounting standards in conformity with the requirements
of the Companies Act 2006
IPO An initial public offering (IPO) refers to the process of offering shares of
a corporation to the public in a new stock issuance
LTV Loan to Value: the outstanding amount of a loan as a percentage of property
value
NAV Net Asset Value
Net Initial Yield Annualised net rents on investment properties as a percentage of the
investment property valuation, less assumed purchaser's costs of 6.8%
Net Loan to Value LTV calculated on the gross loan amount less cash balances
or Net LTV
Omnichannel Stores offering both instore picking and online fulfilment
REIT Real Estate Investment Trust
Running yield The anticipated Net Initial Yield at a future date, taking account of any rent
reviews in the intervening period
Sainsbury's A portfolio consisting of the freehold interest in 26 geographically diverse
high quality Sainsbury's supermarkets
Reversion Portfolio (SRP)
Total Shareholder Return (TSR) The movement in share price over a period plus dividends declared for
the same period expressed as a percentage of the share price at the start
of the Period
WAULT Weighted Average Unexpired Lease Term. It is used by property companies as an
indicator of the average remaining life of the leases within their portfolios
CONTACT INFORMATION
Directors Nick Hewson (Non-Executive Chair)
Vince Prior (Chair of Nomination Committee & Senior Independent Director)
Jon Austen (Chair of Audit Committee)
Cathryn Vanderspar (Chair of Remuneration Committee)
Frances Davies (Chair of ESG Committee)
Sapna Shah (Chair of Management Engagement Committee)
Company Secretary Hanway Advisory
1 King William Street, London, EC4N 7AF
Registrar Link Asset Services
The Registry, 34 Beckenham Road, Beckenham,
Kent, BR3 4TU
AIFM JTC Global AIFM Solutions Limited
Ground floor, Dorey Court, Admiral Park, St Peter Port, Guernsey, Channel
Islands, GY1 2HT
Investment Adviser Atrato Capital Limited
36 Queen Street, London, EC4R 1BN
Financial adviser, Stifel Nicolaus Europe Limited
Joint Corporate Broker and Placing Agent 150 Cheapside, London, EC2V 6ET
Joint Corporate Broker Goldman Sachs International
Plumtree Court, 25 Shoe Lane, London, EC4A 4AU
Auditors BDO LLP
55 Baker Street, London, W1U 7EU
Property Valuers Cushman & Wakefield
125 Old Broad Street, London, EC2N 1AR
Financial PR Advisers FTI
200 Aldersgate Street, London, EC1A 4HD
Website www.supermarketincomereit.com (http://www.supermarketincomereit.com)
Registered Office 1 King William Street, London, United Kingdom, EC4N 7AF
Stock exchange ticker ISIN SUPR
GB00BF345X11
This report will be available on the Company's website.
END
1 (#_ftnref1) The alternative performance measures used by the Group have
been defined and reconciled to the IFRS financial statements within the
unaudited supplementary information
2 (#_ftnref2) Operating profit before changes in fair value of properties
and share of income and profit on disposal from joint venture
3 (#_ftnref3) Adjusted Earnings and Adjusted EPS are calculated as EPRA
Earnings and EPRA EPS adjusted for finance income from derivatives held at
fair value through profit and loss, loan arrangement fee for Joint Venture
acquisition and non-recurring debt restructuring costs. For further
information please see the Key Performance Indicators and EPRA Performance
Indicators sections on pages 39 and 41
4 (#_ftnref4) New financial highlight for the year, expected to be included
in future financials as they provide a more comprehensive understanding of
core business performance
5 (#_ftnref5) Calculated as Adjusted EPRA earnings divided by dividends paid
during the year
6 (#_ftnref6) IGD growth from 2022 to 2023 (forecast), June 2023
7 (#_ftnref7) IGD channel data 2018 to 2022 actuals, 2023 forecast
8 (#_ftnref8) Knight Frank, Savills, MSCI and Atrato Capital research. Year
ending 30 June 2023
9 (#_ftnref9) Blended NIY across the 21 properties
10 (#_ftnref10) SRP investment: the Sainsbury's Reversion Portfolio held in
a joint venture arrangement. See Note 14 to the financial information for
further information
11 (#_ftnref11) Average weighted NIY for the stores at acquisition,
including post balance sheet acquisitions of £36.4m (excluding acquisition
costs)
12 (#_ftnref12) Portfolio statistics include Post balance sheet acquisitions
13 (#_ftnref13) Kantar grocery channel report June 2023
14 (#_ftnref14) Inclusive of uncommitted extension options
15 (#_ftnref15) Knight Frank, Savills, MSCI and Atrato Capital research.
Year ending 30 June 2023
16 (#_ftnref16) Average weighted NIY for the stores at acquisition,
including post balance sheet acquisitions of £36.4m (excluding acquisition
costs)
17 (#_ftnref17) Including uncommitted extension options
18 (#_ftnref18) Competition and Markets Authority, "Competition and Markets
Authority updates on action to contain cost of living pressures in groceries
sector", 20 July 2023
19 (#_ftnref19) Kantar grocery update, June 2023
20 (#_ftnref20) Cushman & Wakefield, Future of Food Chains, 2023
21 (#_ftnref21) Sainsbury's Plan for Better Report, 2022/23 Sustainability
Update
22 (#_ftnref22) 31 December 2022 figures are extracted from the Group's
Interim Report for the six months ended 31 December 2022
23 (#_ftnref23) The Directors have identified certain measures that they
believe will assist the understanding of the performance of the business. The
measures are not defined under IFRS and they may not be directly comparable
with other companies' adjusted measures. The non-GAAP measures are not
intended to be a substitute for, or superior to, any IFRS measures of
performance, but they have been included as the Directors consider them to be
important comparable and key measures used within the business for assessing
performance. The key non-GAAP measures identified by the Group have been
defined in the supplementary information and, where appropriate,
reconciliation to the nearest IFRS measure has been given.
24 (#_ftnref24) 31 December 2022 figures are extracted from the Group's
Interim Report for the six months ended 31 December 2022
25 (#_ftnref25) MSCI UK Quarterly Property Index (June 2022 - June 2023)
26 (#_ftnref26) Tesco & Sainsbury's Q1 trading updates
27 (#_ftnref27) Including post-balance sheet events
28 (#_ftnref28) Including post-balance sheet events
29 (#_ftnref29) Including uncommitted accordions and indications of appetite
from lenders
30 (#_ftnref30) Property yields sourced from MSCI for the period March 2006
to June 2023
31 (#_ftnref31) Knight Frank, Savills, MSCI, Atrato Capital research. Years
ending 30 June.
32 (#_ftnref32) Net Debt/EBITDA
33 (#_ftnref33) Tesco Annual Reports 2017 and 2023, % of net selling space
owned
34 (#_ftnref34) Stores include Sainsbury's - Newcastle, Tesco - Chineham,
Tesco - Bradley Stoke and Sainsbury's - Bangor
35 (#_ftnref35) Turnover: Atrato research based on communication with
operators and store managers, combined with demographic and local competitor
analysis. Store turnover has been inflated based on the time since last store
visit
36 (#_ftnref36) Gross consideration, excluding costs
37 (#_ftnref37) Excluding acquisition costs
38 (#_ftnref38) Excluding costs
39 (#_ftnref39) As at 20 September 2023
40 (#_ftnref40) IGD UK grocery market retail forecast 2023-2028
41 (#_ftnref41) Office for National Statistics 2023
42 (#_ftnref42) Knight Frank, Savills, MSCI and Atrato Capital research.
Year ending 30 June 2023
43 (#_ftnref43) Which? supermarket food price inflation tracker 15/08/2023
44 (#_ftnref44) Atrato research
45 (#_ftnref45) Including uncommitted extension options
46 (#_ftnref46) Profits which are not derived from property rental business
would be subject to corporation tax
47 (#_ftnref47) Emissions not calculated due to lack of data and
immateriality (<1% of total emissions). SUPR does not have an office or
employees. The only travel is quarterly travel by non-exec directors, the
majority of which is local travel in London
48 (#_ftnref48) Values have been rounded
49 (#_ftnref49) Tenant energy consumption only
50 (#_ftnref50) 2023 is the first year of reporting the majority of metrics,
so no prior year comparisons have not been included in this table. The 2024
Annual report will allow for trend analysis and compare metrics disclosed in
2023
51 (#_ftnref51) Excludes three supermarkets and seven ancillary units
located in Scotland, due to differing EPC calculation methodology used, making
the sites non-comparable
52 (#_ftnref52) "Ancillary units" are units not used as a supermarket
53 (#_ftnref53) The Directors have identified certain measures that they
believe will assist the understanding of the performance of the business. The
measures are not defined under IFRS and they may not be directly comparable
with other companies' adjusted measures. The non-GAAP measures are not
intended to be a substitute for, or superior to, any IFRS measures of
performance, but they have been included as the Directors consider them to be
important comparable and key measures used within the business for assessing
performance. The key non-GAAP measures identified by the Group have been
defined in the supplementary information and, where appropriate,
reconciliation to the nearest IFRS measure has been given.
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