REG - Supermarket Inc REIT - Full Year Results For Year Ended 30 June 2022
21/09/2022 07:00
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RNS Number : 0670A Supermarket Income REIT PLC 21 September 2022
SUPERMARKET INCOME REIT PLC
(the "Group" or the "Company")
LEI: 2138007FOINJKAM7L537
AUDITED RESULTS FOR THE YEAR ENDED 30 JUNE 2022
GROCERY SECTOR STRENGTH AND RESILIENCE PROVIDE SUPPORTIVE BACKDROP
Supermarket Income REIT plc (LSE: SUPR), the UK supermarket real estate
investment trust providing secure, inflation-protected, long income from
grocery property in the UK, is today reporting its audited consolidated
results for the Group for the year ended 30 June 2022 (the "Year").
FINANCIAL HIGHLIGHTS
12 months to 12 months to
30-June-22 30-June-21 Change in Year
Annualised passing rent 1 £77.6m £57.8m +34%
EPRA Earnings1 £57.4m £36.8m +56%
Profit before tax £110.3m £82.0m +35%
Dividend per share declared 5.94 pence 5.86 pence +1%
IFRS EPS 11.3 pence 12.6 pence -10%
EPRA EPS1 5.9 pence 5.6 pence +5%
EPRA dividend cover1 1.08x 2 1.04x n/a
30-June-22 30-June-21 Change in Year
IFRS net assets £1,432m £871m +64%
EPRA NTA1 £1,427m £872m +64%
EPRA NTA per share1 115 pence 108 pence +6%
Net loan to value (Direct Portfolio) 1 19.0% 34.0% n/a
Direct Portfolio net initial yield1 4.6% 4.7% n/a
( )
· 7% Total Shareholder Return for the Year
· 48% Total Shareholder Return since IPO in 2017 3 , a 9.7% annualised
Total Shareholder Return
· EPRA NTA per share increased by 7 pence in the Year to 115 pence, a
6% increase
· Direct Portfolio 4 independently valued at £1.57 billion,
increasing by £423.2 million
o Net initial yield ("NIY") of 4.6%
o Weighted average unexpired lease term ("WAULT") of 15 years
o Annualised passing rent increased by 34% to £77.6 million
o 81% of leases are inflation-linked
o 3.7% rental growth on a like-for-like basis
· Net loan to value ("LTV") ratio of 19.0% as at 30 June 2022
· 100% of total rent collected during the year
BUSINESS HIGHLIGHTS
· Further portfolio growth through deployment of £506.7 million of
equity raised via two upsized and over-subscribed issuances of new ordinary
shares leading to:
o Admission to the Official List of the FCA and to the Premium Segment of
the London Stock Exchange plc's Main Market
o Inclusion in the FTSE 250 and FTSE EPRA/NAREIT Global Real Estate Index
Series
· Acquisition of 12 supermarkets for an aggregate purchase price of
£381.0 million (excluding acquisition costs) at a blended net initial yield
of 4.5% and blended WAULT of 19 years 5
· Value of investment in the Sainsbury's Reversion Portfolio increased
by £46.8 million to £177.1 million, predominantly due the exercise of
purchase options by Sainsbury's
· Fitch Ratings Limited ("Fitch") assigned an Investment Grade credit
rating of BBB+ to the Company
Post balance sheet HIGHLIGHTS
· Purchase of five further assets for £216.1 million (excluding
acquisition costs) at a blended NIY of 5.1%
· £412.1 million unsecured bank credit facility agreed at a margin of
1.5% over SONIA and a weighted average term of 6 years 6
· FY 2023 dividend target increased by 1% to 6 pence per share
· Entered into interest rate swaps, hedging the Company's £381 million
drawn unsecured debt
o Weighted average fixed rate of 2.8% (including margin) over an average
term of 4 years
o 100% of drawn debt now hedged at an effective fixed rate of 2.6%
(including margin)
o The cost of new hedging instruments were £35.3 million which will
immediately impact EPRA NTA by 2.8 pence per share
· Agreement with Sainsbury's on the Joint Venture Reversion Portfolio
o £1,040 million sales price agreed on 21 option stores
o New 15 year leases agreed on four stores
o Increases joint venture investment value to estimated £190 million
Nick Hewson, Chairman of Supermarket Income REIT plc, commented:
"I am pleased to be reporting another set of strong full year results for the
Company. This has been another significant year of growth and one in which we
achieved the important milestones of being added to the Premium Segment of the
London Stock Exchange and the FTSE 250 index.
During the year, our Direct Portfolio has benefitted from a 3.7% like-for-like
increase in valuation delivering a 6% increase in EPRA NTA to 115 pence per
share as at 30 June 2022. Since our IPO in 2017, we have delivered a 48% Total
Shareholder Return.
At a time of considerable unpredictability and uncertainty especially for our
economy, we believe our portfolio of targeted, sector specific real estate
assets will continue to deliver stable, long-term, and growing income to our
shareholders."
For further information:
Atrato Capital +44 (0)20 3790 8087
Limited
Steve Noble / Rob Abraham / Chris McMahon ir@atratocapital.com (mailto:ir@atratocapital.com)
Stifel Nicolaus Europe Limited +44 (0)20 7710 7600
Mark Young / Matt Blawat / Rajpal Padam
FTI Consulting +44 (0)20 3727 1000
Dido Laurimore / Eve Kirmatzis / Andrew Davis SupermarketIncomeREIT@fticonsulting.com
The Company will be holding an in-person presentation for analysts at 08.30am
today at FTI Consulting, 200 Aldersgate, Aldersgate Street, London, EC1A 4HD.
To register to attend the in-person meeting, please contact FTI Consulting:
SupermarketIncomeREIT@fticonsulting.com
(mailto:SupermarketIncomeREIT@fticonsulting.com) . There will also be a
webcast facility for that presentation. To join the presentation via the
webcast, please register using the following link:
https://stream.brrmedia.co.uk/broadcast/62fe317600178269f821b191
(https://stream.brrmedia.co.uk/broadcast/62fe317600178269f821b191)
Notes:
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 75 supermarkets((1)) are let to leading UK supermarket operators,
diversified by both tenant and geography.
The Company provides investors with attractive, long-dated, secure,
inflation-linked, growing income with the potential for capital appreciation
over the longer term and targets a 7% to 10% p.a. total shareholder
return((2)). The Company has increased its dividend every year since IPO.
The Company is listed on the premium segment of the Official List of the UK
Financial Conduct Authority and its Ordinary Shares are traded on the Main
Market of the London Stock Exchange, having listed initially on the Specialist
Fund Segment of the Main Market on 21 July 2017.
Atrato Capital Limited is the Company's Investment Adviser.
Further information is available on the Company's website
www.supermarketincomereit.com
1. 49 directly owned supermarkets, plus 26 via joint venture. Please note that
it was announced in January 2022 that Sainsbury's exercised its options to
acquire a total of 21 of the 26 stores within the joint venture portfolio. The
Sainsbury's acquisition of the stores will be completed in two tranches: 13 in
March 2023 and 8 in July 2023. Further information is available on the
Company's website.
2. There is no certainty that these illustrative projections will be achieved
CHAIRMAN'S STATEMENT
Dear Shareholder,
I am very pleased to report another year of solid performance by the Group,
one in which we have delivered a 7% Total Shareholder Return and a cumulative
total return of 48% since our IPO in 2017. The Company has grown its total NTA
to £1.4 billion, a 64% increase on the previous year, and has grown its
portfolio of handpicked supermarket assets to £1.75 billion 7 . We are now
the largest landlord of supermarkets in the UK and our investment strategy of
acquiring top trading omnichannel supermarkets continues to deliver growth for
our shareholders against a challenging macroeconomic and geopolitical
backdrop. During the year we also achieved a significant milestone for the
business, being admitted to the Premium Segment of the London Stock Exchange,
which due to our size, resulted in us becoming a constituent of the FTSE 250
as well as gaining membership of the FTSE EPRA/NAREIT indices. Inclusion in
these indices increases liquidity in the shares and broadens our potential
investor base.
The Company continues to benefit from access to capital and this financial
year raised over £500 million through two highly successful, oversubscribed
equity issuances. Post year-end the Company also arranged a new £412.1
million unsecured credit facility. We are delighted with the level of
financing support, reaffirming the resilient nature and defensive
characteristics of the grocery sector, particularly given the challenges
facing the global economy.
The combination of inflation and sector volume growth has seen turnover at
store level growing ahead of rents. Our estimated average rent to turnover
across the portfolio is now less than 4% meaning that rents are becoming ever
more affordable for our tenants. This combination of sustainable rental growth
and continued investment demand has driven growth in capital values for our
portfolio. As a result, EPRA NTA has increased 6% in the year to 115 pence per
share (2021: 108 pence per share) with net initial yields remaining resilient
despite the challenging backdrop for the broader real estate market.
Our business model has inflation protection at its core, with over 80% of our
rent reviews being inflation-linked. However, rising interest rates have had a
negative impact on earnings due to higher borrowing costs. In the financial
year SONIA rates increased from 0.05% to 1.7% today. The business is partially
protected from these cost pressures both through its inflation-linked income
and its interest rate hedging policies. Additionally, the Company's borrowings
are also well diversified across lenders and maturities. After the balance
sheet date, the Company took the decision to fix its interest rate exposure by
entering into new interest rate swaps. 100% of the Company's drawn debt is now
hedged and has an effective fixed borrowing cost of 2.6%. Despite the increase
in finance costs, the Company still achieved an EPRA Dividend Cover Ratio of
1.08x during the year.
Post balance sheet, the Company has also agreed a purchase price for the 21
stores in the JV portfolio which Sainsbury's had exercised an option to
acquire. In addition Sainsbury's agreed a new leases on four of the remaining
stores. Combined, this is estimated to increase the value of our investment in
the JV to £190 million, or a 1.7 times return on purchase cost.
Environment, Social and Governance ("ESG") remains a key priority for us.
During the year our Investment Adviser recruited a Head of Sustainability to
advance and accelerate our ESG ambitions. We have become supporters of the
Task Force on Climate-related Financial Disclosures ("TCFD") and signatories
of the UN Principles for Responsible Investment ("UN PRI"). In addition, we
have defined and published an equivalent tonnes of CO(2) figure for the
Company as part of our commitment to transparency and environmental
stewardship and have now embarked on a benchmarking process to look for
opportunities to improve further the sustainability of our sites.
We are also delighted to welcome Frances Davies to the Board. Frances brings a
wealth of experience in corporate finance, asset management and relevant board
roles. Frances has agreed to chair a new committee of the Board that we have
established to deal specifically with ESG issues.
We have historically increased our dividend in line with our annualised rental
growth, increasing the dividend from 5.5 pence per share at IPO to 5.94 pence
per share in 2022. Whilst our annualised contractual rental growth for this
year was 1.8% we recognise the current market uncertainty, especially around
interest rates, and we are therefore targeting a more conservative increase in
the dividend for the next financial year of 6.0 pence per share.
Outlook
While the impact of COVID lockdowns has receded this year, we are nevertheless
faced with another set of macroeconomic headwinds in the form of higher
interest rates, geopolitical uncertainty and a possible recessionary
environment for the UK. At the same time, our long-dated, substantially
inflation linked leases 8 (#_ftn8) , together with our strong tenant
covenants operating in a non-discretionary spend sector, positions us well as
a business and we stand ready to take advantage of opportunities which may
arise.
Nick Hewson
Chairman
20 September 2022
A conversation with Justin King about the future of the UK grocery sector
Justin King is a senior adviser to Atrato Capital, the Group's Investment
Adviser. 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 and Asda. He is currently
Non-Executive Director of Marks & Spencer and advises a series of high
profile consumer-focused companies. Justin is an advocate for responsible
business, has been instrumental in launching a number of charitable concerns
and also chairs 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.
Consumers are facing unprecedented increases in the cost of living. What can
supermarket operators do to support customers in this current cost of living
crisis?
Well firstly, supermarket operators' primary role is to represent their
customers in the supply chain. In the current market that means challenging
food manufacturers and producers on the basis of any price inflation to keep
price rises in check. We see evidence of that with the recent, and much
publicised, row between Tesco and Heinz on the price of a tin of beans. The
retailers are rightly challenging price rises through tough negotiation with
the supply base.
Secondly, operators need to do what they can on their own cost structure and
pass those savings through to consumers through lower prices. The operators'
ability to limit price rises is less than many people think, as the sector's
competitiveness already drives low margins and high operational efficiencies.
The third aspect operators can change is their product lines on the shelves.
Facilitating customers' switch from expensive calories to less expensive
calories could actually be their most impactful contribution. Think of it as
giving the customer the ability to achieve a cut in their pence per calorie
consumed. 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.
Looking forward, can we expect operator profit margins to suffer as customers
switch to less profitable value ranges?
Not necessarily, you need to remember that in a recession the first change the
customer will make is a shift away from expensive calories and the most
expensive are those consumed out of the home in restaurants and takeaways.
Rarely will a customer's total calorie consumption change through the economic
cycle, instead what you observe is a shift in the discretionary additional
spend of their calorie consumption from eating out, to eating in. In a
recession, that favours the supermarket. So, the net impact of a customer
shifting towards perhaps lower margin value range is often offset via an
increase in overall volumes across all price ranges.
Is there a risk those mechanics are changing given the growth of the German
discounters in the UK?
It's worth remembering that the presence of discounters in the UK grocery
market is not new, nor is their business model. Aldi and Lidl have opened
stores and gained significant market share in recent years, however previous
discounter brands such as Netto (acquired by Asda) and KwikSave (acquired
in-part by Co-Op) have all but disappeared. The current market share of Aldi
and Lidl is (16%) which is actually the 'normal' market share for the UK
grocery discounter channel as far back as the early '90s.
In terms of growth, there is no doubt that Aldi and Lidl have been highly
successful in opening smaller format stores and capturing market share
quickly. Combined over the last five years, they've opened around 500 stores,
hence the headlines on growth in sales and market share. In addition, the
discounters have seen dramatic sales increases in more recent months, bringing
more and more customers through their doors as the pressure of rising costs
mounts and consumers look to greater value ranges to cut costs. According to
data from Kantar, in the four weeks to 4 September 2022 Aldi exceeded
Morrisons in becoming the fourth largest grocer in the UK.
However, if we look at Aldi and Lidl's current UK market share it's still
significantly less than their market share in Europe and I think this
illustrates just how effective the UK grocers have been in competing on price
with their own value product range. It's also worth noting that we cannot look
at this in isolation. While the discounter growth is capturing the headlines,
in my view the traditional grocers are rightly focused on capitalising on the
online and convenience growth opportunity. Over the last three years, the
online channel has grown significantly and the traditional grocers have been
highly successful in capturing this growth channel, already controlling over
80% of the online market. Remember most of these online customers are also
physically shopping in their supermarkets too!
Online demand has declined over the last 12 months, does this worry you given
the online capex investment we have seen in the last few years?
We are experiencing a post-COVID-19 normalisation of consumer shopping
patterns as people return to shopping in stores. The data points to a
reduction in online grocery's market share from its high point of above 15%
during the height of the pandemic and national lockdown, to its current post
pandemic level of around 12%.
The online channel's current market share of 12%, or £22 billion, is up
around 80% compared to its pre-COVID level. That makes online the fastest
growing channel in the UK. I believe this trend will continue, underpinned by
the structural change in working habits towards more work from home. Working
people are at home more often which means they don't have to rely on those
scarce evening or weekend online delivery slots to get their groceries
delivered.
The improvements in omnichannel profitability from this growth are impressive.
Economies of scale drive profitability with both delivery densities and item
pick rates per hour well above pre-pandemic levels. In my view, productivity
and profitability will continue to improve. What this does show is the
importance, flexibility and resilience of the omnichannel store pick model.
The store pick model facilitated a doubling of online capacity in the height
of the pandemic and allowed the traditional Big Four (Tesco, Sainsbury's,
Asda, Morrisons) grocers to capture market share and dominate that channel. As
online demand falls back post pandemic, that capacity is being scaled back at
relatively little cost.
In contrast, pure play online operators that rely on heavily automated
warehouses faced capacity constraints during COVID induced sharp market
upturns. The pure play online operators lost market share to omnichannel
operators who were able to rapidly flex their in-store fulfilment.
I have always believed one should think about customer, not channel. In a post
pandemic era, the customer requires seamless integration between online and
offline channels. The growing investment in the pursuit of omnichannel stores
is a significant development within the grocery industry and empowers the
grocer to be truly blind to channel. The grocers are best advised to be
focused purely on the customer and agnostic to whether the sale takes place
via the front of the store through physical sales or the back of the store via
an online sale.
Given the recent record years for inward investment into both grocery
operators and supermarket property, do you think the uncertain economic
environment will impact investment volumes and returns from supermarket
property?
During a period of macro-economic uncertainty, the grocery sector has been a
stand-out positive performer. When you examine supermarket property investment
performance trends over the last 15 years you see the strength and stability
of this asset class.
I have always said that there is no greater retail business proposition than a
large, grocery-led supermarket with fresh food at its heart, in the right
location. Supermarkets generate significant cash flow and are the core
infrastructure of how and where consumers shop.
Supermarkets represent resilient investments, generally avoiding the volatile
peaks and troughs of the economic cycle. Investors looking for property assets
that offer consistent returns and low volatility have increasingly targeted
the supermarket property sector.
Having said that, not all supermarket property is equal and specialists like
the Atrato Capital team are essential to ensure the right asset selection for
the long term.
KEY PERFORMANCE INDICATORS
Our objective is to provide secure, inflation-protected, 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
1. Total Shareholder Return Shareholder return is one of the Group's principal measures of 7% for the year to 30 June 2022 (2021: 11%)
performance.
Total Shareholder Return ("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, 15 years WAULT as at 30 June 2022 (2021: 15 years)
weighted by the Direct Portfolio valuations.
3. EPRA NTA per share The value of our assets (based on an independent valuation) less the book 115 pence per share as at 30 June 2022 (2021: 108 pence per share)
value of our liabilities, attributable to Shareholders and calculated in
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 Direct Portfolio gross asset value that is funded by 19% as at 30 June 2022 (2021: 34%)
borrowings calculated as balance sheet borrowings less cash balances divided
by total investment properties valuation.
5. EPRA EPS Earnings attributable to Shareholders adjusted for other earnings not 5.9 pence per share for the year ended 30 June 2022 (2021: 5.6 pence per
supported by cash flows and calculated in accordance with EPRA guidelines. share)
The Group uses alternative performance measures, as disclosed above and
including the European Public Real Estate ("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 statements
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 statements.
EPRA PERFORMANCE INDICATORS
The table below shows additional performance measures, calculated in
accordance with the Best Practice Recommendations of the European Public Real
Estate Association (EPRA). We provide these measures to aid comparison with
other European real estate businesses. The Group voluntarily adopted the EPRA
issued new best practice reporting guidelines in the current year,
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.
For a full reconciliation of all EPRA performance indicators, please see the
Notes to EPRA measures within the unaudited supplementary section of the
Annual Report.
Measure Definition Performance
1. EPRA Earnings per Share A measure of EPS designed by EPRA to present underlying earnings from core 5.9 pence per share for the year ended 30 June 2022 (2021: 5.6 pence per
operating activities. share)
2. EPRA Net Reinstatement Value (NRV) per share An EPRA NAV per share metric which assumes that entities never sell assets and 124 pence per share as at 30 June 2022 (2021: 118 pence per share)
aims to represent the value required to rebuild the entity.
3. EPRA Net Tangible Assets (NTA) per share An EPRA NAV per share metric which assumes entities buy and sell assets, 115 pence per share as at 30 June 2022 (2021: 108 pence per share)
thereby crystallising certain levels of unavoidable deferred tax.
4. EPRA Net Disposal Value (NDV) per share An EPRA NAV per share metric which represents the Shareholders' value under a 116 pence per share as at 30 June 2022 (2021: 107 pence per share)
disposal scenario, where deferred tax, financial instruments and certain other
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 4.6% as at 30 June 2022 (2021: 4.8%)
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
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 0.2% as at 30 June 2022 (2021: 0.4%)
whole portfolio.
7. EPRA Cost Ratio Administrative & operating costs (including costs of direct vacancy) 16.5% for the year ended 30 June 2022 (2021: 16.8%)
divided by gross rental income.
8. EPRA LTV* Net debt divided by total property portfolio and other eligible assets. 22.2% for the year ended 30 June 2022 (2021: 36.3%)
*New measure reported during the year, with prior year comparative stated in
line with new methodology
INVESTMENT ADVISER'S INTERVIEW
Atrato Capital Limited is the Investment Adviser to Supermarket Income REIT
("SUPR"). Ben Green (Principal of Atrato Capital) and Robert Abraham (Managing
Director, Fund Management) answer questions on SUPR's performance and the
long-term outlook for the business.
Q: Summarise the key achievements and milestones in the year for SUPR?
Ben: This has been a transformative year for SUPR. In February 2022 the
Company migrated its listing to the Premium Segment of the London Stock
Exchange and subsequently joined the FTSE 250 and FTSE EPRA NAREIT indices.
This is a significant milestone for the Company which will bring a number of
benefits to shareholders and reflects how far we have come in a relatively
short time.
During the year, we raised over £500 million of equity through two
significantly over-subscribed equity issues. In addition, Fitch Ratings
assigned an Investment Grade credit rating of BBB+ to the Company in February.
Following this, in July 2022 we announced a new £412.1 million unsecured
credit facility. This is the first time the Company has accessed unsecured
debt financing providing greater flexibility to manage our portfolio and
optimise our capital structure.
The Company now has exposure to 75 UK supermarkets with a total portfolio
value of £2 billion and has become the UK's largest landlord of omnichannel
stores. We are delivering on our investment strategy of targeting handpicked,
top performing, omnichannel supermarkets, providing long dated, inflation
linked income. The Company's carefully selected Portfolio is unique, acquired
during the rapid growth of omnichannel shopping in the space, and is
impossible to replicate.
The market has recognised the success of the investment model as the Company
has outperformed the FTSE All Share over the period since IPO.
Q: What has this growth done to the profile of the portfolio?
Rob: As our Portfolio continues to grow, we benefit from economies of scale
and increased diversification by both geography and tenant, which is further
reinforced by seeking to achieve representation of the key UK grocery market
participants within the Portfolio.
Including post balance sheet acquisitions, we have deployed a total of £597.1
million into 19 carefully selected stores at an accretive blended net initial
yield of 4.8%. This has been accretive to both the quality and geographic
diversification of the Portfolio. We have also been able to maintain the WAULT
at 15 years.
We were pleased to add our first two Asda stores and we acquired five
additional high quality smaller format stores including two stores occupied by
Aldi in the discounter space and three M&S Foodhalls as premium range
operators.
All our investments go through a rigorous financial, property, ESG and
performance due diligence assessment. A good example is the top trading
Cwmbran, Asda acquired in January 2022 which was a fantastic addition to the
Portfolio having a lease length of 10 years, representing the most dominant
store in the town with strong trading performance and benefiting from a
substantial investment programme by Asda to expand its home delivery operation
from the store.
Our investment strategy is to buy the best performing supermarkets in the UK
and in some cases we will acquire non-grocery units which are on the same site
as the supermarket. These are complementary to the grocery offering and often
drive greater footfall. We sometimes acquire additional non-grocery units in
order to control the overall site. As at 30 June 2022 our non-grocery assets
accounted for less than 10% of our Direct Portfolio by value and by rent.
Q: What is an omnichannel store and why the focus on omnichannel assets?
Ben: We have always seen omnichannel stores as the future model of UK grocery.
The pandemic demonstrated that omnichannel stores are the optimal method of
online fulfilment due to their proximity to consumers. This reduces delivery
time and cost.
Omnichannel is the dominant model for last-mile grocery fulfilment. Over 80%
of all online orders are now fulfilled from omnichannel supermarkets. These
stores are critical to the operations of the UK's leading grocers and to the
country as feed the nation infrastructure.
The seamless integration between online and offline fulfilment provides our
tenants with economies of scale and operational efficiencies. Together with
the growing profitability of online operations, this model is empowering
operators to be truly agnostic to channel. The global themes of consumers
demanding more choice, more quality, faster fulfilment and all at lower
prices, results in omnichannel supermarkets being ideally placed to serve
these desires whether online or physical.
There is not expected to be a return to historic working patterns. Greater
home working leads to a bigger household spend on grocery and a larger
penetration of online grocery. We estimate that this combination of enlarged
market size and growing online penetration is driving like-for-like sales
growth of over 13% for omnichannel stores. This makes omnichannel the fastest
growing format in UK grocery and highly resilient as an asset class.
Q: What impact is inflation having on your investment portfolio?
Rob: Our rental income has in-built protection through the attractive terms of
our leases.
All rents are upwards only at the point of review. We have a mix of review
types, with 81% of our reviews linked to inflation. Consequently, these leases
provide a natural inflation hedge and enable our income to grow in line with
inflation (subject to caps and floors on the reviews).
On a like for like basis, the annualised increase in the Company's rental
income was 3.7% with most of this rental growth also captured in our portfolio
valuation. During the year, like-for-like value growth was also up 3.7%,
increasing our Direct Portfolio valuation by £42 million and increasing our
EPRA NTA by 6% to 115 pence per ordinary share as at 30 June 2022. Therefore,
the benefits of inflation linked growth in our rents flow through to both EPRA
earnings and EPRA NTA.
It is common for property leases with inflation linked rent reviews to be
subject to annual caps. Across our Direct Portfolio our average inflation
linked rent review cap is currently 4%. We are, of course, seeing grocery
inflation above this 4% cap. As such the turnover of our stores is also
growing ahead of rents making our leases more affordable as a proportion of
store turnover. The estimated average rent to turnover in the Company's
Portfolio is now 3.9% against an industry benchmark of 4%.
We have strategically increased the proportion of stores in the Portfolio with
open market rent reviews ("OMV") to 12% by rental income. OMV rent reviews are
typically uncapped and determined based on market rents in the local area.
With the high growth in grocery revenues, we see value in these leases given
the potential for uncapped future rental growth in a highly inflationary
environment.
Q: What is the impact from the higher interest rate environment?
Ben: The Company has historically hedged its interest rate risk on annualised
borrowings through either fixed rate debt or fixing variable rates using
financial derivatives. At year end, 60% of the Company's drawn debt was
hedged. After the balance sheet date, the Company took the decision to fix its
interest rate exposure by entering into new interest rate swaps. 100% of the
Company's drawn debt is now hedged and has an effective fixed rate borrowing
of 2.6%. We believe this was a prudent and proactive decision which
essentially de-risks the Company's interest rate exposure ahead of a period of
extreme uncertainty.
Q: Will you have to invest significant capital into your existing assets to
meet higher environmental standards?
Ben: The short answer is "no". We are well placed in this regard.
Firstly, our tenants all have genuine and ambitious commitments to net zero,
which means that they have investment programmes across both freehold and
leasehold stores, for instance rolling out energy efficient lighting and
refrigeration.
Secondly, we own mission critical real estate so whether a supermarket
operator achieves a physical sale or online, it all goes through the store
networks. That means the operators are continually investing in our stores to
keep them modern and improve the shopping experience, that also helps to
improve energy efficiency.
We have a number of examples of stores which have improved from a legacy EPC E
rating to a B rating simply through tenant works, at zero cost to the Company.
We have defined and published an equivalent tonnes of CO(2) figure for our
Portfolio as part of our commitment to transparency and environmental
stewardship and have now embarked on a benchmarking process to look for
opportunities to improve further the sustainability of our sites. For example,
we are undertaking works to seek to improve the sustainability of our
locations, which includes rooftop solar and working on the rollout of EV
charging in our car parks.
Our Portfolio is now 81% A-C EPC rated and we have asset management plans in
place for all properties which are D or below.
Q: Will you be acquiring more assets and what is the priority for 2023?
Rob: Yes, we plan to continue to grow where we see attractive acquisition
opportunities which are accretive to our unique Portfolio.
As the UK's only listed specialist investor in grocery real estate, we have
established unique relationships and coverage across the sector, coupled with
our depth of experience in UK grocery, providing us with a competitive
advantage in sourcing assets.
We operate with the aim of acquiring the best trading supermarkets in the UK
and identifying further purchases which would be accretive to our return
profile or where we can add value through active management. Our aim is to
maximise risk-adjusted returns while ensuring we continue to maintain and grow
income.
While we talk a lot about the growth in the portfolio, in the current economic
environment it's also worth remembering the highly defensive nature of our
Portfolio. Our supermarkets are held on long, inflation linked leases and our
tenants are some of the biggest names in the non-discretionary, UK grocery
space.
Ben: 2023 is going to be another very busy year. Continuing to embed our
sustainability agenda across the business is a huge priority that will
continue to make a positive impact on our local communities and environments.
We will also continue to seek out new opportunities for growth to add to our
already substantial pipeline and we'll be looking to drive further value from
the existing Portfolio through active asset management.
We are also optimistic that the current economic uncertainty may unlock some
assets that we have coveted for a long time and/or offer the opportunity to
acquire assets at attractive yields.
THE COMPANY'S PORTFOLIO
We have built a unique portfolio of top trading omnichannel supermarkets,
diversified both by geography and tenant. Our properties are 'mission
critical' to our grocery tenants, operating as key online fulfilment hubs as
well as generating in store physical sales. The leases on our stores benefit
from long unexpired terms, with the strong covenants of the UK's leading and
largest grocery operators reinforcing the value of these assets. As sector
specialists we have strong relationships with the grocery operators and the
financial year ended 30 June 2022 saw new grocery tenants added in Asda and
M&S Food.
During the financial year, the Group further strengthened its Direct Portfolio
with the addition of 12 supermarkets (including supermarket anchored) assets
for £381.0 million (excluding acquisition costs)
These acquisitions have a blended unexpired lease term of 19 years and a
blended net initial yield of 4.5%.
The Group's investment strategy is to acquire high quality supermarkets which
are sometimes located on sites which contain non-grocery elements. During the
year the Group acquired 12 non-grocery units on 3 supermarket sites for £16.4
million (excluding acquisition costs). This amount is included in the total
site costs, listed above. All of the units are occupied.
Post balance sheet the Group acquired five assets for a total acquisition cost
of £216.1 million (excluding acquisition costs) and a blended net initial
yield of 5.1%.
The acquisitions were primarily financed by two expanded and oversubscribed
equity raises and the proceeds of new and existing secured and, post balance
sheet, unsecured banking facilities. For more information on financing
arrangements see the Financial Statement in this document.
A table summarising the properties in the Direct Portfolio of supermarkets 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 47.5% 47.4%
Sainsbury's 27.9% 29.9%
Morrisons 7.0% 7.6%
Waitrose 5.4% 6.0%
Asda 2.4% 2.1%
Aldi 1.0% 1.0%
M&S 0.8% 0.8%
Non-grocery 8.0% 5.3%
Total 100% 100%
The Direct Portfolio benefits from attractive long term, inflation linked
leases with strong tenant covenants (Tesco, Sainsbury's, Morrisons, Waitrose,
Aldi, Marks & Spencer and Asda).
The long-term strength and resilience of the Group's income is underpinned by
a weighted average unexpired lease term of 15 years on the Direct Portfolio
(including post balance sheet acquisitions) with a weighted average yield of
4.7% (including post balance sheet acquisitions). In addition to the long
average length of these leases, our portfolio is heavily weighted towards
fixed and inflation-linked leases which provide resilience in an inflationary
environment. 81% of the Direct Portfolio benefits from upward only,
indexed-linked rent reviews subject to annual floors and caps (Including post
balance sheet acquisitions).
Tenant Income mix by
rent review type
RPI 73.2%
CPI 7.7%
Fixed 2.4%
OMV 16.8%
Total 100.0%
As we have continued to acquire high quality assets, our EPC scores have
increased within the portfolio. A breakdown by rating seen below:
Supermarket EPC breakdown
EPC rating % of portfolio
A 4.2%
B 43.8%
C 33.3%
D 18.8%
Total 100%
Portfolio case studies:
Washington, Sainsbury's
This store provided a rare opportunity to acquire a strong trading Sainsbury's
supermarket with a 35 year unexpired lease term and attractive lease
fundamentals. The store, which was built in the late 1970s, was extensively
refurbished in 2011 and has a significant omnichannel operation forming a key
part of Sainsbury's online network in the region.
Leicester, Tesco and Aldi
The Tesco and Aldi in Leicester are both co-located on Bradgate Mall, Beaumont
Leys. The Aldi was acquired on strong lease terms providing 15 years of 2%
fixed rental growth and was the first Aldi store added to the Portfolio. On
acquisition, the Tesco lease had 5-yearly OMV rent reviews with an 8 year
unexpired lease term. Due to the strong trading performance of the store,
Tesco agreed to regear the lease in February 2022. The new 15 year lease was
agreed with rent reviews based on annual RPI (subject to a 0% floor and 4%
cap). The store has a significant omnichannel operation servicing 18 delivery
vans and a Click & Collect facility making it a key part of the Tesco
online network within the region.
Prescot, Tesco
This large format Tesco supermarket was acquired in September 2021 as part of
an off-market transaction. Tesco has operated from the site since the early
1990s and the store was redeveloped in 2010. The store has a large omnichannel
operation supporting 12 delivery vans which form part of Tesco's online
grocery network in the region. The store was regeared on acquisition with
Tesco agreeing to a new 15 year lease with annual CPI linked rent reviews
(subject to a 0% floor and 4% cap).
The asset further increases the proportion of indexation within the Portfolio
and highlights the important relationships that the Company has within the
market.
Sainsbury's Reversion Portfolio
In May 2020 the Company formed a 50:50 joint venture (the "JV") with British
Airways Pension Trustees Limited to acquire from British Land Plc a 25.5%
stake in one of the UK's largest portfolios of supermarket properties (the
"Sainsbury's Reversion Portfolio") for £102 million, excluding acquisition
costs. Subsequently, in February 2021 the JV acquired a further 25.5% stake in
this portfolio from Aviva for £115 million, excluding acquisition costs.
The Company's total contribution to the JV was £112.0 million, excluding
acquisition costs. The equity interests in the properties are now owned by
Sainsbury's (49%) and the JV (51%).
The Sainsbury's Reversion Portfolio comprises a high-quality portfolio of 26
predominantly omnichannel Sainsbury's supermarkets with strong trading
histories and attractive property fundamentals. The stores in the Sainsbury's
Reversion Portfolio are leased to Sainsbury's until 2023. The investment case
for acquiring the stakes in the Sainsbury's Reversion Portfolio was largely
based on the Company's conviction that Sainsbury's would want to remain in
occupation of a large majority of the stores.
In September 2021 and in January 2022, Sainsbury's exercised options to
acquire 21 stores within the Portfolio. This outcome was in-line with the
Company's initial underwriting of the transaction and is evidence of the
strength of demand for UK grocery assets. The Company determined at the year
end that the exercise of the purchase options resulted in the performance
obligation being satisfied for a sale of properties in accordance with IFRS
15. Following the exercise of these options the JV was deemed to hold a
contractual receivable from Sainsbury's, the value of which is based on the
estimated purchase price for the assets and has been determined with reference
to a valuation prepared by Cushman & Wakefield (see below).
After the year end, the Company announced the purchase price on the 21 option
stores was formally agreed at £1,040 million. The purchase by Sainsbury's plc
is expected to complete between March 2023 and July 2023 on expiry of the
current leases.
Sainsbury's has agreed to retain occupation of 4 of the 5 remaining stores
within the Portfolio under a new 15-year lease agreement with five yearly open
market rent reviews and a tenant break at year 10.
This agreement is estimated to increase the value of the JV to £190 million.
Further details on the valuation of the Sainsbury's Reversion Portfolio can be
found in Note 14 to the financial statements.
Portfolio valuation
Cushman & Wakefield valued the Direct Portfolio as at 30 June 2022, 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 Portfolio as a whole. The Direct
Portfolio market value was £1.57 9 billion, an increase of £423.2 million
following valuation growth of £42.2 million and new acquisitions of £381.0
million.
This valuation growth of the Direct Portfolio reflects the supermarket
operators' covenant strength as tenants, together with rental growth and
overall increased demand in the investment market for high quality assets.
The properties within the Sainsbury's Reversion Portfolio were also
independently valued by Cushman & Wakefield, 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 net carrying value of the Company's underlying investment was
£177.1 million, increasing by £62.4 million above the Group's combined
investment cost of £114.7 million (including capitalised acquisition costs),
which arises from the profit generated by the joint venture in the
post-acquisition period.
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 overall UK grocery market changed?
To understand longer term grocery market trends it's important to compare data
to the pre-pandemic period. UK grocery is up 13% since 2019 and IGD estimates
the UK grocery market will now reach £217 billion in 2022 which is an
increase of over £25 billon since 2019.
The legacy of the pandemic has been the emergence of a permanent shift towards
increased home working. This has increased in-home consumption and the weekly
shopping basket by some 5% to 10%, resulting to a large extent in this
positive 13% shift in grocery sales. Since the start of 2019, average
inflation was around 7%(( 10 )) so the sector has experienced significant
volume gains.
Looking ahead, inflation continues to rise. According to the latest data from
Kantar, UK grocery inflation reached 12.4% in September 2022, up from 11.6% in
August and 9.9% in July and that will drive further growth in the sector.
Unlike other retail sectors, grocery is a non-discretionary expenditure so
price inflation will inevitably translate into elevated market size. This is
one reason why we view investment in UK grocery real estate as a good
long-term hedge against inflation.
Q. Who are the largest operators in the UK grocery market?
The UK market is highly concentrated with the seven largest grocers
controlling over 80% of the UK grocery space.
The traditional Big Four boast a combined market share of approximately
65%(( 11 )). Each of these businesses have multi-billion-pound revenues, an
established consumer brand and strong credit covenants. Together they serve
customers through more than 7,500 stores in 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.
The second largest group of operators is the lower-price grocery operators
(the "Discounters") such as Aldi and Lidl who continue to grow through
ambitious store opening plans which have captured a combined market share of
16% 12 . Their lower cost, low-margin business model requires simplicity and
standardisation of range which is attractive to price sensitive customers but
at odds with the fulfilment intricacies and product assortment required in
online grocery.
Q. What are the largest and fastest growing channels in the UK?
As illustrated below, the supermarket channel remains the dominant sales
channel in the UK grocery market, while online grocery is the fastest growing.
Over the last three years online grocery is up over 73% and now has a 12% UK
market share. This is up from 8% prior to the pandemic in 2019. Online
ordering has now become an integrated part of customers' grocery shopping
habits. Data from IGD shows that online grocery sales contributed over £10
billion to total UK grocery growth, materially exceeding the £5 billion
growth in the UK discounter channel which is the second fastest growth
channel.
Omnichannel store networks are key in meeting this increased demand for online
fulfilment. The traditional Big Four dominate the online channel with a
combined 85% market share in online grocery. Over 90% 13 of their online
sales are fulfilled from omnichannel supermarkets.
Combining in-store supermarket sales (the most dominant channel) with online
fulfilment (the fastest-growing channel) sees around 60%(13) of all UK grocery
market sales fulfilled through omnichannel supermarkets. This has resulted in
like-for-like sales growth of 13% for omnichannel supermarkets. This sales
growth means the Company's rents are highly affordable and we expect market
rents in the omnichannel asset class will over time exceed wider supermarket
market rents.
In more recent months, the discounters have seen dramatic sales increases,
bringing more and more customers through their doors as the pressure of rising
costs mounts and consumers transition towards greater value changing what they
buy and how they shop to cut costs. According to Kantar in the 4 weeks to 4
September 2022, Aldi market share of 9.3% exceeded Morrisons 9.1% becoming the
fourth largest grocer in that period.
These market share gains reflect consumers' reaction to the sudden
cost-of-living increase caused by high energy price inflation as their lower
cost, low-margin business model has been highly successful in attracting price
sensitive consumers. We believe this channel will continue to grow
and expect to see a growing number of discount supermarket property come to
the investment market.
Q. What changes have you seen in the omnichannel format?
The UK's traditional Big Four pioneered the development of an omnichannel
business model which seamlessly integrates both in-store and online
fulfilment. Their dominance in online grocery has only been achievable due to
this network of omnichannel supermarkets and illustrates the vital role of the
omnichannel store operating as last mile logistics nodes in the nation's food
supply network. The COVID-19 pandemic generated an 80% increase in online
demand. This increased online penetration has transformed the profitability of
omnichannel grocery fulfilment. With in-store and online profit margins now at
near parity, omnichannel stores provide operators the benefit of achieving a
seamless integration of customer experience across all channels. 14
Recent technology developments mean that smaller automated micro fulfilment
systems, or urban fulfilment centres ("UFCs"), can now be housed within
supermarket back of house areas. These smaller systems can house 20,000
product lines and automate the picking of dry goods that require minimal
management within the storage system. Picking of fresh and frozen items that
are difficult and expensive to automate is done in store via physical store
pick. Whilst this technology is new and will take time to deploy, we believe
it represents the next evolution of the omnichannel store model. This
development would enable stores to meet greater demand and deliver increased
profitability.
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 caps and 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 have supermarket investment returns and yields performed?
Supermarket property offers relative stability compared to the broader UK
commercial property market. When you examine supermarket property investment
performance over the last 15 years you see the strength and stability of this
asset class. During periods of economic uncertainty, the grocery sector has
been a strong and resilient investment, generally avoiding the volatile peaks
and troughs of the economic cycle. Investors looking for property assets that
offer consistent returns and low volatility have increasingly targeted the
supermarket property sector.
Atrato compiles a yield series of all supermarket property transactions with
lease lengths of greater than 10 years and larger store format sizes. This
provides an accurate reflection of the segment of the market which the Company
typically targets.
Average investment yields on supermarket property reached a 20 year low of
4.3% in 2007, during which interest rates peaked over 6%, before a period of
negative yield shift during the financial crisis. Yields have since
strengthened, tightening to a current average of 4.5% in 2022. In contrast to
other property sectors, supermarket yields have remained relatively stable and
resilient across this time period. Supermarket yields are currently higher
than IPD All Property yields of 4.0% and Distribution Warehouses of 3.7% which
have seen significant yield compression and valuation increases in recent
years.
Supermarket property will not be entirely immune to the challenging broader
macroeconomic environment. However, the defensive characteristics displayed by
these assets coupled with ongoing demand for long-term secure income is
expected to make supermarket property yields highly resilient.
Q. How has supply and demand for supermarket property performed?
The supermarket sector is a highly attractive asset class within real estate
investment. The improved financial performance by the UK's major grocery
operators against a backdrop of growing UK grocery demand and inflation has
attracted domestic and international institutional investors to supermarket
property.
In addition, we are also witnessing an increasing number of transactions with
shorter lease terms. Research shows that transactions for those assets with an
unexpired lease term of under 20 years accounted for 70% of deals in 2021, up
from 60% in 2020. Meanwhile, more deals are completing with an open market
rent review leasing structure. Both of these developments illustrate the
increased confidence in rental growth driven by the strong trading performance
of the grocery sector.
There has been some supply of new grocery investment property opportunities
due to the growth in the store network of the Discounters, however, the
buyback of supermarket property by Tesco over the previous five years has
resulted in a net overall contraction of supply.
We expect investment volumes to decline somewhat in 2022 from the £1.8bn
annual volumes seen in 2020 and 2021. However, 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.
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
2022.
IFRS net rental income for the year to 30 June 2022 increased by 50% to £72.1
million, up from £47.9 million in the prior year. Contracted inflation rent
reviews in the year, including a number of 5 yearly rent reviews, resulted in
average passing rent increases in the Portfolio of 3.7% compared to 1.4% in
the prior year, as a result of the higher inflationary environment witnessed
over the last year, with many reviews hitting their maximum rental caps. A
further £11.5 million of rental contributions were also recognised from new
acquisitions during the year.
Administrative and other expenses, including management and advisory fees and
other costs of running the Group, were £14.2 million (2021: £9.5 million),
generating an EPRA cost ratio of 16.5% (2021: 16.8%).
Financing costs for the year were £13.0 million (2021: £8.5 million). The
Group's weighted average cost of finance at 30 June 2022 was 2.6% (2021:
1.9%). The increase in net financing costs reflects the increase in the
quantum of the Group's banking facilities and towards the latter part of the
year increases in sterling borrowing rates. The Group's continued conservative
leverage policy maintains a robust interest cover at 668% compared to the
covenant at a minimum of 200%. Further information on financing and hedging is
provided below.
As a result of the above, 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 50.4% to £58.2 million (2021: £38.7
million).
Change in fair value of the Direct Portfolio investment properties in the year
was £21.8 million (2021: £36.3 million), which is comprised of a £42.3
million increase in valuation offset by £17.6 million of acquisition costs
and £2.9 million of rent smoothing and guarantee adjustments. The Group's
EPRA NTA at 30 June 2022 equates to 115 pence per ordinary share (2021: 108
pence per ordinary share).
The Sainsbury's Reversion Portfolio continues to be an accretive investment,
with the share of income from joint venture increasing by 179% to £43.3
million (2021: £15.5 million), the growth in part due to the Group increasing
its stake in the portfolio in February 2021. During the reporting period,
Sainsbury's exercised purchase options to acquire 21 of the 26 stores in the
portfolio.
The Group is a qualifying UK Real Estate Investment Trust ("REIT") which
exempts the Group's property rental business from UK Corporation Tax 15 . The
Total Shareholder Return for the year was 7% (2021: 11%). This is measured as
the growth in share price over the financial year of 1.7% (2021: 5.6%), plus
dividends declared for the year of 5.94 pence per share (2021: 5.86 pence per
share) divided by the share price at the beginning of the financial year.
Equity raising and debt financing
In October 2021, the Group completed an upsized and oversubscribed £200
million Placing and Offer for Subscription in which 173,913,043 new ordinary
shares were issued at 115 pence per share representing a 6.5% premium to
prevailing EPRA NTA at the time of issue. Following a strong level of support
from investors during the marketing roadshow, the October Placing was
increased from the original target of £100.0 million.
In April 2022, the Company successfully completed a further oversubscribed
Placing of ordinary shares, raising £306.7 million. A total of 253,492,160
new ordinary shares were issued at 121 pence per share, representing a 7.1%
premium to the Company's last reported EPRA NTA at the time of issue. The
April Placing was increased from an original target of £175 million due to
strong levels of investor support during the marketing roadshow.
The Group has raised in total £506.7 million through its two equity placing
programmes during the year, issuing a total of 427,405,203 shares. A further
1,743,049 shares were issued by the Group as part of its SCRIP dividend
scheme, meaning 1,239,868,420 shares were in issue as at the year end.
During the year, the Group also increased its debt facilities as follows:
- In August 2021, the Group increased its secured term loan with
Deka by £20.0 million to £96.6 million for the remaining three-year term.
The new tranche of the secured term has a fixed rate of 1.72%.
- In August 2021 the Group also completed a one-year extension
alongside a £10.0 million increase to its now £150.0 million Revolving
Credit Facility with HSBC, priced at a margin of 1.75% above SONIA.
- In September 2021, the Group exercised its accordion option under the
Wells Fargo credit facility by £61.3 million. The tranche was priced at a
margin of 1.40% above SONIA and was refinanced shortly after the year end with
the proceeds of the new unsecured facility of which Wells Fargo participated
as part of the wider bank syndicate (see below).
- In January 2022, the Group arranged a £136.5 million increase to its
Revolving Credit Facility with Barclays and Royal Bank of Canada. This
facility was priced at a margin of 1.50% above SONIA and was also refinanced
after the year end through the proceeds of the new unsecured facility, of
which Barclays and Royal Bank of Canada both participated as part of the wider
bank syndicate (see below).
After the year end, the Group secured a new £412 million unsecured borrowing
facility at 1.5% above SONIA, which was the first time the Group accessed
unsecured debt financing. The proceeds of the new facility were used to
refinance a portion of the Group's existing secured debt and to fund further
supermarket acquisitions which completed after the year end.
The Group also completed in September 2022, a further two-year extension
(inclusive of a one-year accordion option at lender's discretion) on its £150
million Revolving Credit Facility with HSBC, where all other terms of the
facility remained unchanged.
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* Interest cost** Loan commitment Loan commitment Amount drawn at 30 June 2022
30 June £m* (Post balance sheet) £m
£m
Barclays / RBC Revolving Credit Facility Jan-26 1.50% plus SONIA 300.0 77.5 138.75
Bayerische Landesbank Term Loan Jul-23 2.56% 52.1 52.1 52.1
Bayerische Landesbank Additional Term Loan A Jul-23 1.98% 7.3 7.3 7.3
Bayerische Landesbank Additional Term Loan B Aug-25 2.03% 27.5 27.5 27.5
Deka Bank Term Loan Aug-26 1.89% 47.6 47.6 47.6
Deka Bank Term Loan Aug-26 2.05% 28.9 28.9 28.9
Deka Bank Term Loan Aug-26 1.72% 20.0 20.0 20.0
HSBC Revolving Credit Facility Aug-25 1.65% plus SONIA 100.0 100.0 -
HSBC Revolving Credit Facility Aug-25 1.75% plus SONIA 50.0 50.0 -
Wells Fargo Revolving Credit Facility Sep-23 1.40% plus SONIA 100.0 - -
Wells Fargo Revolving Credit Facility Jul-27 2.19% 30.0 30.0 30.0
Wells Fargo Revolving Credit Facility Jul-27 2.11% plus SONIA 30.0 9.0 -
Total 793.4 449.9 352.2
Post balance sheet events
Unsecured bank syndicate Revolving Credit Facility Jun-29 2.84% n/a 250.0 n/a
Unsecured bank syndicate Term Loan Jun-27 2.84% n/a 100.0 n/a
Unsecured bank syndicate - Hedged Term Loan Jan-25 2.84% n/a 30.6 n/a
Unsecured bank syndicate Term Loan Jan-25 1.50% plus SONIA n/a 31.5 n/a
Total 793.4 862.1 352.2
*Inclusive of uncommitted accordion options
**Interest cost is inclusive of hedging arrangements where applicable. Amounts
stated do not include unamortised arrangement fees.
The new and increased debt facilities combined (including post balance sheet
events) have a weighted debt maturity of 4.5 years (including extension
options) (2021: 4.0 years) and a current cost of borrowing of 2.8% (2021:
1.9%).
The Group continues to have a conservative leverage policy, with a medium term
LTV target of 30%-40%. At the end of the year, total net debt was £297.3
million, resulting in a net loan-to-value ("LTV") ratio of 19% (2021: 34%).
Including post balance sheet acquisitions, the Group's Gross LTV currently
stands at 33%. The Group has further balance sheet capacity to utilise for
opportunities which may come to market.
Each loan drawn under the credit facilities requires interest payments only
until maturity and is secured against both the subject properties and the
shares of the property-owning entities. This is with the exception of the new
unsecured facilities completed after the year end where the loans are not
secured against any of the Group's properties. Each property-owning entity is
either directly or ultimately owned by the Group.
The Group continues to maintain significant headroom on its LTV covenants
which contain a maximum 60% LTV threshold and a minimum 200% interest cover
ratio for each asset in the Portfolio. As at 30 June 2022, the Group could
afford to suffer a fall in property values of 54% before being in breach of
its LTV covenants. With current hedging arrangements in place the Group has
significant interest cover headroom. Within the Going Concern period of 12
months from the signing of the accounts, £59.4 million of the BLB loan falls
due, however as per the Going Concern Note 1 of the financial statements this
is expected to be refinanced.
After the year end date, the Company took the decision to fix its interest
rate exposure by entering into interest rate swaps to hedge the Company's
£381 million of drawn unsecured debt for a weighted average term of 4 years.
100% of the Company's drawn debt is now hedged at an effective fixed rate of
2.6% (including margin). The cost of acquiring the hedges was £35.2 million
which will immediately impact EPRA NTA by 2.8 pence per share.
Further details of the Group's debt and interest rate hedging can be found in
Notes 20 and 21 to the financial statements.
Dividends
The Company has declared four interim dividends for the year as follows:
· On 23 September 2021, a first interim dividend of 1.485 pence per
share, which was paid on 16 November 2021
· On 10 January 2022, a second interim dividend of 1.485 pence per
share, which was paid on 25 February 2022
· On 6 April 2022, a third interim dividend of 1.485 pence per
share, which was paid on 27 May 2022
· On 8 July 2022, a fourth interim dividend of 1.485 pence per share,
which was paid on 22 August 2022
The Group's EPRA dividend cover ratio was 1.08x for the year (2021: 1.04x).
The increase reflects the level of deployment of the equity proceeds resulting
in an increase in the EPRA earnings available to cover the dividends paid in
the financial year.
The Company has increased the quarterly dividend payable from October 2022 by
1.0% from 1.485 to 1.50 pence per share, which will be the fifth consecutive
year of annual dividend increases.
The Company is targeting a dividend for the year to 30 June 2023 of 6.0 pence
per share.
Atrato Capital Limited
Investment Adviser
20 September 2022
SUSTAINABILITY AND TCFD ALIGNED REPORT
Introduction
During the reporting period, the Company has continued to develop its
sustainability strategy. As part of the implementation of this strategy the
Investment Advisor has recruited a Head of Sustainability, Christoph Scaife.
Christoph took up this role in February 2022 and will take the lead in further
developing and implementing the Company's sustainability strategy with the
Company's investment team. A key element of the Company's ESG strategy focuses
on defining the Company's investment impact. This includes environmental,
social and governance risk management, as well as quantifying positive and
negative impacts from its investment activities. These actions are designed to
ensure that investments are made having assessed all aspects of risks and
opportunities to preserve and grow capital for the long term.
As part of the work undertaken by the Investment Adviser's board in 2021 and
2022 several sustainability related priorities have been identified as key to
delivering value for the Company's stakeholders. These were based on an
in-depth materiality assessment which highlighted four key elements, namely:
i) mitigation of environmental impact, ii) introducing the highest standards
of governance and reporting, iii) engagement with tenants and wider
stakeholders, and iv) responsible citizenship and support for communities.
Task-Force on Climate Related Financial Disclosures (TCFD)
During the reporting year the Company has commenced reporting climate related
disclosures using the four pillars from the TCFD framework. This includes the
calculation of the Company's carbon emissions. The Company has interpreted
these disclosures below.
Governance
Refining our Approach
Building on work such as the detailed materiality assessment undertaken in
2021, the Company continues to refine its strategy to deliver more sustainable
business practices. We have also started to develop an operational framework
that drives continuous focus on safeguarding of the environment and society.
In May 2022 SUPR joined the United Nations Principles for Responsible
Investing (PRI). This introduction of a best-in-class sector related
governance standard was an important step in bringing the Company in line with
international best practice as a Responsible Investor. The PRI defines
responsible investment as a strategy and practice to incorporate ESG factors
in investment decisions and active ownership. With a strong emphasis on
stewardship, and close contact between our investors and Company Board, the
Group is well suited to fulfil the role of a responsible investor. In 2022/3
the Company will focus on refining its approach to identifying and managing
ESG issues across the Portfolio.
The Nomination Committee recommended the appointment of Frances Davies with
effect from 1 June 2022. Frances' depth of experience in corporate finance and
asset management will allow her to contribute to the development and
implementation of our strategy and the long-term sustainable success of the
Group. Frances is currently a partner of Opus Corporate Finance, a corporate
finance advisory business, and is a Non-Executive Director at HICL
Infrastructure Plc and JP Morgan Smaller Companies Investment Trust. Frances
will be the Sustainability Champion for the Board and will ensure that
Sustainability matters are taken into account at all levels.
During the financial year, the Board has worked to implement a more formal
sustainability approach by reviewing the reporting and governance framework
under which it operates. The Terms of Reference of the Audit Committee were
updated to include the responsibilities of ESG oversight in relation to the
Company's internal processes and the investment activities carried out by the
Investment Adviser. Subsequently it was agreed that the Board would convene a
dedicated ESG Committee which will be Chaired by Frances Davies as part of her
role as Sustainability Champion for the Board. We have outlined our approach
to responsible investment on our website, and, prior to the end of 2022, we
will publish our commitments to implement goals and targets for the period
ahead.
The Board continues to review updates to the business strategy, ensuring
performance, policy and fund objectives meet the changing requirements for
Sustainability in the sector. By the end of 2022 the Investment Adviser has
and will continue to focus on refining and developing their ESG evaluation
methodologies and impact measurement frameworks to address the incoming
legislation and climate change disclosure requirements. The Investment Adviser
will draw upon the highest governance standards and best practices to ensure
that the fund achieves its long-term goals. These commitments will be met with
tangible steps to drive performance. Consequently, we have primarily focused
our initial actions on the following areas:
• Strengthening oversight of ESG and sustainability
• Integration of ESG and sustainability criteria
into the evaluation of asset acquisition
• Ensuring our assets enhance the communities in
which they are located
• Commitment to enhance the sustainability of our
buildings
• Engagement and partnership with tenants
Progress on Key Sustainability Themes
Good Governance and Reporting
As a first step, we have formalised our ESG commitments into policies, updated
the Terms of Reference of the Board's committees, and refined our overall
reporting framework. During the year to 30 June 2022, we commenced a rigorous
assessment of our approach to oversight and governance of sustainability,
which is central to the development of an effective strategy. This review
resulted in integrating sustainability criteria into the remit of the newly
appointed ESG Committee, under the oversight of Frances Davies, the Chair. The
Terms of Reference of the Committee were updated to reflect this change and to
ensure a focus on sustainability factors on a par with the financial aspects
of our business. Simultaneously, Steve Windsor, Principal at Atrato Group,
undertook responsibility for the monitoring and managing of ESG risks and
opportunities at our Investment Adviser.
This decision was guided by an internal analysis of the skills, knowledge,
experience of our directors, which identified the most appropriate framework
to address and oversee ESG factors. In line with the recommendations of the
AIC Code of Corporate Governance, during the past year, the Board also carried
out an assessment of the current structure and operation of the Board. That
assessment evaluated the balance of skills, knowledge, experience,
independence and diversity of the Board. The results of this evaluation helped
us to identify areas we can strengthen. The process is detailed in full in the
Nomination Committee report.
Under the strengthened governance structure, the Board has approved the
Group's Sustainability Strategy, Sustainability Policy and other relevant
policies. Quarterly updates are sent from the Investment Adviser. The Board
also oversees the Investment Adviser's policies to ensure that environmental
and social priorities are incorporated into the investment strategy. In line
with the increased focus on sustainability at the Company and across our
stakeholders, the Atrato Group recently finalised and published its own ESG
policy, which can be found on its website.
Our Strategy
Materiality Risk Assessment
The Company completed its risk evaluation matrix in 2021, which highlighted
the need to address climate related issues from a sustainability point of
view, as well as from a compliance aspect. As the UK government has finalised
its Minimum Energy Efficiency Standard (MEES), an industry goal to achieving a
2(o)C world and Net Zero target, with increased energy efficiency at the heart
of achieving these goals. As the assets held within the Portfolio are managed
though the tenants, an engagement strategy has been developed by the Company
to collaborate with tenants on how to tackle these issues, including climate
related factors such as flooding, power purchasing and carbon reduction
commitments from the tenant's supply chain.
Labour standards and the minimum wage levels have become a major risk for
operators as the cost of living has risen dramatically in 2022. These issues
have a knock-on effect for tenants and consumers alike and the need to reduce
operational costs throughout the supply chain needs to be addressed. The need
to be aware of consumer habits and satisfaction is more material than ever,
with a renewed focus on the consumer and the cost of supply as well as
disposal or end of useful life for products.
Opportunity Identification
A key route to delivering positive impact are the possibilities arising from
the growth of the electric vehicles industry, and its need for electric
charging points. The Company is looking at where there is a viable demand for
charging stations, both on assets that are directly managed and those where
tenants have the capacity to install charging points.
The Company is looking at where there is a viable demand for charging stations
and parking capacity and rights for installation. The Company is also keen to
support tenant led installations, where possible. This initiative aligns with
the UK government's intention to reduce subsidies for private home charging
connections and focus on providing charging points that are accessible to the
wider public.
Tenant engagement
The majority of the Company's tenants are leading supermarket retailers who
have already committed to implementing high standard sustainability practices.
However, as these clients have large portfolios and varying sustainability
agendas the focus of these groups may not align with the Company's priorities.
As a result, the portfolio management team will draft an engagement strategy
to address key sustainability aspects to ensure the Company meets its
sustainability agenda. One focus of the Company's engagement strategy includes
obtaining data on how tenants are capturing and reporting their emissions data
as well as their actions to reduce greenhouse gas emissions and lower energy
usage. The Company will focus engagement efforts over the coming year with
tenants to obtain accurate data on energy performance, looking at what energy
sources tenants are drawing their power from, and whether they have considered
purchasing renewable energy. Tenants are strongly considering how to reduce
energy costs and emissions and these efforts also include roof top solar.
Environmental
Establishing responsible practices throughout the Company's landlord
controlled operations and supply chain is a key part of the Company's
engagement strategy. During 2022 the Company will continue to focus on the
responsible disposal of waste and green energy contracts. A key focus area of
engagement between the Company and the tenants is the energy performance of
assets. The Company has set out a target to ensure the Portfolio remains in
line with the Government's requirements and selected assets have been
identified as medium risks to not achieving compliance with these standards in
2023. Collaborating with our tenants to address major environmental risks
through the use of independent assessments is being introduced by the Company
and will continue as part of a monitoring and assurance programme.
Social
As a result of the growth of electric vehicles, the need for a greater
quantity of electric charging points has arisen. EV charging points improve
accessibility for customers who drive EV vehicles, and may encourage others to
move to this type of vehicle. Supermarkets offer a compelling opportunity to
include EV charging points for shoppers, as this is an efficient use of
consumers' time to charge their vehicles while they shop. We articulate this
further below.
Governance
The Company continues to keep EPC assessments up-to-date to understand the
environmental performance of its assets. Included in these assessments are
possible opportunities for energy efficiency improvements which we assess on a
case-by-case basis. This assurance process allows the portfolio management
team to focus their engagement efforts on those assets most at risk of
underperforming against key sustainability metrics, as well as highlighting
possible high impact energy efficiency opportunities that can maximise
shareholder value.
Responsible Citizenship and Community Support
The Board firmly believes that the Company can achieve a positive impact in
its communities. The Company, through its Investment Adviser, is in the
process of incorporating the Atrato Charitable Foundation which plans to use
capital from the fund to support various charities whose values align with
that of the Group. These charities may include community development,
educational support and gender inclusivity.
Risks
Mitigation of Environmental Risks
Climate change is one of the defining issues of our time and we realise that
actions taken today will have repercussions for the future. While decoupling
the economy from emission generation is a complex task, requiring major policy
and behaviour changes, we believe that there is a role to play for all sectors
and especially investors such as the Company. New technology now forms a part
of the investment consideration, where assets can provide their own routes to
positive impact and reduce their own carbon footprint, for example, through
the use of solar PV panels, waste management and reduced water consumption, to
name a few. As these solutions become more cost effective and accessible, we
are engaging with our tenants to look at possibilities to optimise their
positive impact opportunities and look beyond what are the current normal
conventions of day-to-day business.
As identified in the risk materiality assessment undertaken in 2021, and
evaluated on a rolling basis since then, the risk of downgrading energy
inefficient assets is material for some assets. The Company is conducting
third party evaluations of its sites to monitor changes in risks. These
independent reviews will provide the Group with reliable and up to date EPC
assessments of the performance of its assets. Included in these assessments
are possible opportunities for impact improvements, energy savings and key
asset improvements. This assurance allows the asset management team to focus
their engagement efforts on those assets most at risk on underperforming as
well as highlighting possible impact opportunities that can maximise
shareholders value. It is expected that these corrective measures will ensure
that the Company maintains its compliance with MEES while also reducing
possible to other environmental risks, and in some cases the exposure to
volatile energy costs.
Metrics and Targets
During the reporting period, we continued to assess the EPC ratings of our
Portfolio and benchmark current performance against historic performance, as
well against the future Minimum Energy Efficiency Standards that came into
effect in 2016. The overall value weighted portfolio rating is C-56, as at 30
June 2022. There were eight properties with an EPC rating of 'D' on that date
representing 19% of the Portfolio by number and 18% by value. This compares to
14 properties which had a D or E rating at the end of the prior financial
year, showing progressive improvement in the energy rating of our assets
year-on-year.
We make a conscious effort to acquire assets with stronger EPC ratings or
where we are able to identify opportunities to improve the EPC rating through
active engagement with the occupier.
In addition to enabling the Company to drive improvements in its existing
Portfolio, a deeper understanding and assessment of the EPC profile of the
Portfolio also provides additional detail to help inform future investment
strategy. We are also actively looking at how lease renewals on existing
properties can be structured to add incentives that would encourage tenants to
undertake improvements to reduce emissions, energy and resource use.
Company Emissions
2022 marks the first year in which the Company has calculated its emissions at
the Company and at the Investment Adviser level. Following this exercise, it
was concluded that the total emissions, mostly due to electricity and
refrigerants, account for 97% of the Company's total emissions. No
refrigerants were included in the analysis for Petrol Filling Stations (PFS)
or non-grocery sites, as tenants do not disclose their air conditioning
reports, and as such certain adjustments and assumptions had to be made to
include these assets in the overall total. The reporting sample covers 105
supermarket sites and PFS, which were counted separately.
The Company's total emissions for the reporting period are 87,715 tonnes of
CO2 equivalent. The classification of these emissions is categorised as Scope
3 Category 13 Downstream Leased Assets, since any asset that a company owns
but does not have control over must be included in its Scope 3 indirect
emissions. The Company leases properties to tenants, which means it must
include the tenants' Scope 1 and 2 emissions within the Company's Scope 3
Category 13 emissions. The main heating fuel type according to the data from
the EPC assessments of our supermarket portfolio was natural gas, whereas
non-grocery and PFS sites were mainly heated using electricity. As per GHG
Protocol guidelines, the emissions from biomass are out of scope and,
therefore, not included in the total Scope 1,2, and 3 emissions. Natural gas
accounts for 77% of emissions and it should be noted that if tenants switched
to non-fossil fuel heating, this would represent a significant opportunity to
decrease emissions for the Company and tenants alike. The Company does not
have any offices or employees, as such only the emissions of its tenants are
included in the GHG inventory. The Investment Adviser will report separately
on its emissions in its annual report.
SUPR GHG Inventory Methodology
SUPR accounts for the emissions of commercial buildings that it is directly
owns and leases out to various tenants, some of whom do not record their
emissions or have a strategic plan to reduce their emissions. In the first
year of Greenhouse Gas (GHG) accounting, no activity data was available, so
estimations were required throughout. Scope 1 (heating and refrigerants) and
scope 2 (electricity) was estimated for each site using publicly available
data from Energy Performance Certificates (EPCs). CIBSE data was used to
provide intensity estimates based on floor area for the different commercial
building types. Certain data assumptions have been made to estimate the size
of petrol filling stations, since this data was not provided.
Scope 1 (Heating)
The main heating fuel type was taken from the EPC. Some gaps existed and it
was assumed that, in these cases, sites at the same location used the same
heating fuel types. CIBSE data was used to provide intensity estimates
(kWh/m(2)) of the fossil fuel heating use. For sites that used electricity as
their main heating fuel type, the fossil fuel heating consumption was given a
value of 0 (nil). CIBSE provides intensity estimates for typical and good
practice energy use. The EPC rating was used to assume whether a site had
typical practice energy use (EPC rating of D or below) or good practice energy
use (EPC rating of C or above).
When petrol filling stations are counted as their own site, five sites used
biomass heating and 53 used natural gas. The remaining 47 sites were heated
using electricity. The latest DEFRA emission factors were applied to the kWh
of consumption for heating to calculate the emissions at a site level.
Scope 1 (Refrigerants)
Publicly available air conditioning (AC) certificates were used to determine
the type and amount of refrigerants used by supermarkets. Where this data was
not available for certain sites, other sites that were similar in terms of
size and tenant were used as a proxy.
As per EPA data, the size of the air conditioning equipment used was dependent
on the amount of refrigerant used and the floor area. It was assumed that air
conditioning was used for 6 months of the year in the UK. Loss rates were
taken from DEFRA data. Supermarket refrigeration was estimated as no activity
data was available. An intensity estimate (refrigerant charge per square foot)
was taken from EPA data and the refrigerant used was the most common for this
activity according to UNEP. Refrigerant loss rate for refrigeration was taken
from DEFRA data.
No refrigerants were estimated for non-grocery or petrol filling station
sites.
Scope 2 (Electricity)
CIBSE data was used to provide intensity estimates (kWh/m(2)) of the
electricity use. The EPC rating was used to assume whether a site had typical
practice energy use (EPC rating of D or below) or good practice energy use
(EPC rating of C or above).
Five supermarket sites have solar photovoltaic (PV) panels on their roofs.
Google Maps was used to identify the number of solar panels on the roofs. An
estimate was made as to the amount of energy produced per panel and that was
applied to the total solar panels for each site. The amount of electricity
generated from the solar panels at these five sites was subtracted from the
estimate for the total electricity consumption. It was assumed that the five
supermarkets receive the full generation from the panels, meaning the
electricity generated from them is attributed solely to the supermarkets.
The latest DEFRA emission factors were applied to the kWh of consumption for
electricity to calculate the emissions at a site level.
The calculations and evaluations have been calculated by The Anthesis Group, a
third party contractor who was contracted out by the Company.
External Recommendation on Emissions
The Company contracted Anthesis Consulting to undertake its emissions
calculations, as well as provide recommendations to improve the emissions and
reporting quality for future reports. Selected recommendations include the
setting of targets, and to validate emissions through an external organisation
such as the SBTi.
As the majority of our tenants publicise their GHG emissions, the Company
should use its position to encourage tenants to provide more detailed data and
communicate it publicly to show stakeholder groups their improvements on
sustainability practices.
The Company is required to meet emissions reductions and future MEES
legislation, and this will influence the focus of the Investment Adviser's
efforts to ensure that all investments meet these requirements.
The Investment Adviser will develop training for key staff members on the
importance of climate action and their role in it.
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 removed in the current year and are no longer
shown on the matrix:
· Impact of COVID-19: The Company has not experienced any material
adverse impacts from the COVID pandemic, which warrants the removal of this as
a principal risk. However, we continue to monitor the impact closely
· European Union exit without EU trade deal ("Brexit"): The Company has
not experienced any material adverse impacts from Brexit. However, we are
keeping this under constant review given the recent news of plans to amend
parts of the NI protocol
The following risks have been added in the current year and are discussed in
detail below:
· A reduction in the energy efficiency of the portfolio
· Volatile changes to weather systems
· The rise in cyber risks
· Inflationary pressures on the valuation of the portfolio
· Impact of the war in Ukraine
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
Low Moderate Our Direct Portfolio is 99.9% let (100% of supermarket assets are let) with
long weighted average unexpired lease terms and an institutional-grade tenant
An adverse change in our property valuations may lead to breach of our banking base.
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
our loan commitments, resulting in a fall in our net asset value. All the leases contain upward-only rent reviews, 81% are inflation linked, 17%
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
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.
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.
We select assets that have 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
4. Our use of floating rate debt will expose the business to underlying
interest rate movements as interest rates continue to rise
Probability: Impact: Mitigation
Moderate 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.
(from Low) 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
profitability and ability to pay dividends to shareholders.
We aim to hedge prudently our SONIA exposure, keeping the hedging strategy
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.
5. A lack of debt funding at appropriate rates may restrict our ability
to grow
Probability: Impact: Mitigation
Low Low Before we contractually commit to buying an asset, we enter discussions with
our lenders to get uncommitted approvals (where borrowings are secured), which
Without sufficient debt funding we may be unable to pursue suitable investment ensures that we can borrow against the asset and maintain our borrowing
opportunities in line with our investment objectives. policy.
If we cannot source debt funding at appropriate rates, this will impair our The Board keeps our liquidity and gearing levels under review. We have
ability to maintain our targeted level of dividend. recently broadened our capital structure by starting to transition our balance
sheet to an unsecured structure, reducing our reliance on a single source of
funding.
Supermarket property has remained popular with lenders, owing to long leases
and letting to single tenants with strong financial covenants and being seen
as a safe asset class in times of market uncertainty. We have seen increased
appetite from lenders to provide financing for future acquisitions albeit that
some of our existing lenders have indicated that they are close to reaching
capacity in some asset classes.
The Company has had two oversubscribed capital raises during the year ended 30
June 2022 which has provided increased liquidity and enabled the continuation
of the Company's growth. We believe that this indicates that alternative
credit sources will become available in the short to medium term and we will
become less reliant on bank funding.
6. 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
7. There can be no guarantee that we will achieve our investment
objectives
Probability: Impact: Mitigation
Low Low The Board uses its expertise and experience to set our investment strategy and
seeks external advice to underpin its decisions, for example independent asset
Our investment objectives include achieving the dividend and total returns valuations. There are complex controls and detailed due diligence arrangements
targets. The amount of any dividends paid or total return we achieve will in place around the acquisition of assets, designed to ensure that investments
depend, among other things, on successfully pursuing our investment policy and will produce the expected results.
the performance of our assets.
Significant changes to the Portfolio, both acquisitions and disposals, require
Future dividends are subject to the Board's discretion and will depend, on our specific Board approval.
earnings, financial position, cash requirements, level and rate of borrowings,
and available distributable reserves.
The Investment Adviser's significant experience in the sector should continue
to provide us with access to assets that meet our investment criteria going
forward.
Rental income from our current Portfolio, coupled with our hedging policy,
supports the current 6.00 pence per share dividend target. Movement in capital
value is subject to market yield movements and the ability of the Investment
Adviser to execute asset management strategies.
8. 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
9. 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 uses its expertise to maintain adherence to the UK REIT regime by
monitoring the REIT compliance. The Board has also engaged third-party tax
If the Company fails to remain a REIT for UK tax purposes, our profits and advisers to help monitor REIT compliance requirements and the AIFM also
gains will be subject to UK corporation tax. monitors compliance by the Company with the REIT regime.
Climate Risks
10. 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
Low Moderate An ESG committee has been created to develop a roadmap for an energy efficient
property portfolio including an appropriate policy for minimum energy
As investors increase their focus on climate risk, there is likely to become a performance across the Group's assets.
larger pool of capital looking to invest in energy efficient assets.
The Company has engaged with external experts to assess the work required and
Although this represents an opportunity for those best-in-class assets to the respective costs of implementation.
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.
Many of the supermarket operators have published targets to achieve net zero
Given the unexpired lease terms across the Portfolio, this trend may impact and are actively upgrading stores to make them more energy efficient.
the residual values implicit in valuations and reduce tenant demand for these
properties.
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 to
install rooftop solar panels across the Company's Portfolio.
Climate Risks
11. Volatile changes in the weather systems may deem the Group's properties
no longer viable to tenants
Probability: Impact: Mitigation
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.
The Investment Adviser's asset management team will continue to monitor the
changing physical risk as it develops through regular site visits to the
Group's assets.
Cyber Risks
12. The rise in attempted cyber crime and more recently cyber risks arising
from 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 which has robust
IT security and data protection policies in place. These are reviewed
Given the increase in remote and hybrid working, this greater reliance on frequently, alongside business continuity plans in the event of major
technology has resulted in organisations becoming more vulnerable to cyber disruption to the organisation.
threats and online hacking.
For all other key service providers appropriate policies are sought and
As an externally managed REIT, all services are contracted with external third reviewed in respect of cyber security and data protection.
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.
Market Price Risk
13. 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
Moderate Moderate The Company may seek to address any significant discount to EPRA 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% of the ordinary shares in issue as at IPO; being
Although the Company's ordinary shares have to date traded in a relatively 1.21% of the total shares in issue as at 30 June 2022.
narrow range closely related to the price at which they were issued, 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 recent move to
the premium list of the London Stock Exchange will increase liquidity in Ordinary shares will be repurchased only at prices below the prevailing NAV
shares, thereby reducing the risk that Shareholders will not be able to sell per ordinary share, which should have the effect of increasing the NAV per
their 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.
Macroeconomic Risks
14. Inflationary pressures on the valuation of the Portfolio
Probability: Impact: Mitigation
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
15. 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. This could lead to a recession food means that demand is relatively inelastic, where the end consumer may
should the conflict move towards a broader regional or global one. decide to substitute luxury brands for supermarket own-branded products.
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.
Market Price Risk
13. 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
Moderate
Moderate
Although the Company's ordinary shares have to date traded in a relatively
narrow range closely related to the price at which they were issued, 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 recent move to
the premium list of the London Stock Exchange will increase 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 EPRA 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% of the ordinary shares in issue as at IPO; being
1.21% of the total shares in issue as at 30 June 2022.
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.
Macroeconomic Risks
14. Inflationary pressures on the valuation of the Portfolio
Probability:
Impact:
Mitigation
Low
Moderate
The UK is experiencing historic price rises with the highest inflation rate in
40 years, and a slowing economy. The Bank of England has responded by
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.
Inflation is monitored closely by the Investment Adviser. The Group's
Portfolio rent reviews include a mixture of fixed, upward only capped as well
as open market rent reviews, to hedge against a variety of inflationary
outcomes.
Macroeconomic Risks
15. Impact on the war in Ukraine
Probability:
Impact:
Mitigation
Low
Moderate
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
consumer confidence and financial markets. This could lead to a recession
should the conflict move towards a broader regional or global one.
Supermarket operators have historically been able to successfully pass on
inflationary increases through increasing price increases to the end consumer.
Whilst sales volumes may fall in a recessionary environment, the nature of
food means that demand is relatively inelastic, where the end consumer may
decide to substitute luxury brands for supermarket own-branded products.
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 continued
to place significant 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 2022. In assessing the going concern basis of
accounting the Directors have had regard to the guidance issued by the
Financial Reporting Council.
The Board regularly monitors the Group's ability to continue as a going
concern. Included in the information reviewed at quarterly Board meetings are
summaries of the Group's liquidity position, compliance with loan covenants
and the financial strength of its tenants. Based on this information, the
Directors are satisfied that the Group and Company are able to continue in
business for the foreseeable future, being a period of at least twelve months
from the date of approval of the financial statements, and therefore have
adopted the going concern basis in the preparation of these financial
statements.
In light of the Group's current position and principal risks, the Board has
assessed the prospects of the Group for the period to 30 September 2023,
reviewing the Group's liquidity position, compliance with loan covenants and
the financial strength of its tenants, together with forecasts of the Group's
future performance under various scenarios. The Board has concluded there is a
reasonable expectation that the Group will be able to continue in operation
and meet its liabilities over that period. The Board has also assessed the
prospects of the Group over a longer period than the going concern review and
has a reasonable expectation that the Group will be able to continue in
business over the five-year period examined in that assessment.
During the year covered by this report, the Group has raised a total of
£506.7 million from the issue of equity shares and a further £180.0 million
under the various banking facilities. All financial covenants have been met to
date; at the year end, there was significant headroom in our covenants
including property values needing to fall by 54.3% for a breach of covenants
to occur. £59.4 million of the Group's BLB loan facility falls due in July
2023. The Directors' expect this facility to be refinanced in advance of its
expiry however it is also noted that the Group has sufficient headroom in its
existing facilities to repay this facility in full if required.
After the year end, the Group secured a new £412 million unsecured borrowing
facility at 1.5% above SONIA, which was the first time the Group accessed
unsecured debt financing. The Group also completed in August 2022, a further
two-year extension (inclusive of a one-year accordion option at lender's
discretion) on its £150 million Revolving Credit Facility with HSBC, where
all other terms of the facility remained unchanged. Further details are set
out in the notes to the financial statements.
The Group generated net cash flow from operating activities in the year of
£63.0 million, with its cash balances at 30 June 2022 totalling £51.2
million and available debt facilities at 30 June 2022 of £705.0 million. The
available debt facilities post year end were £862.1 million. The Group had no
capital commitments or contingent liabilities as at the balance sheet date.
100% of contractual grocery rent for the Year has been collected in full.
The Group benefits from a secure income stream from its property assets that
are let to tenants with excellent covenant strength, and are critical to the
UK grocery infrastructure, under long leases that are subject to upward only
rent reviews. The WAULT at the year-end was 15 years (2021: 15 years).
As a result, the Directors believe that the Group is well placed to manage its
financing and other business risks and that the Group will remain viable,
continuing to operate and meeting its liabilities as they fall due over the
assessment period. The Directors are therefore of the opinion that the going
concern basis adopted in the preparation of the financial statements is
appropriate.
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 2027. 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 40 to 52 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 2027, 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 was
able to extend the £150.0 million RCF falling due in August 2023 on
acceptable terms. 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 a reduction of variable
debt from cash inflows and by hedges enacted after the year end.
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 report on pages 13 to 20. 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 21 to 25. Disclosures in relation to
environmental and social issues have been included within the ESG section on
pages 30 to 39. 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 9 to 12.
Nick Hewson
Chairman
20 September 2022
SECTION 172(1) STATEMENT
The Directors consider that in conducting the business of the Company over the
course of the year ended 30 June 2022, they have acted to promote the
long-term success of the Company for the benefit of shareholders, whilst
having regard to the mattes 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 55 to 61. Further details of the Board activities and principal
decisions are set out on pages 75 to 77 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:
s172 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 77.
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 55 to 61.
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 75 and 76.
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 stakeholders on pages 55 to 61.
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 pages 71 and 72.
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 stakeholders on pages 55 to 61.
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 stakeholders on pages 55 to 61.
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 30 to 39.
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 explained on pages 30 to 39.
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 Chairman's letter on corporate governance on pages 62 and 63.
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. Principal risks and uncertainties on pages 40 to 52.
The risk of falling short of the high standards expected and thereby risking Our culture on pages 71 and 72.
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 Chairman's letter on corporate governance on pages 62 and 63.
oversees investor relations initiatives to ensure that views and opinions of
Shareholders can be considered when setting strategy. Our Key stakeholders on pages 55 to 61.
DIRECTORS' REPORT
The Directors present their report together with the audited financial
statements for the year ended 30 June 2022. The Corporate Governance
Statement pages 78 to 82 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 until 22 February 2022 on the
Specialist Fund Segment of the London Stock Exchange's Main Market. On the 23
February 2022, the Company migrated to the Premium List of the London Stock
Exchange's Main Market and the Company's shares were traded on the Premium
List from this date. The Group has entered the Real Estate Investment Trust
(REIT) 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 statements. It
is the policy of the Board to declare and pay dividends as quarterly interim
dividends.
In respect of the 30 June 2022 financial year, the Company has declared
interim dividends amounting to aggregate 5.94 pence per share (2021: 5.9 pence
per share). The following dividends were declared during the year and
subsequently:
Date declared Amount per share (pence) Date paid
8 July 2021 1.465 7 August 2021
23 September 2021 1.485 16 November 2021
10 January 2022 1.485 25 February 2022
6 April 2022 1.485 27 May 2022
8 July 2022 1.485 22 August 2022
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 Directors who served throughout the year unless otherwise stated
otherwise, are detailed below:
Director Service in the year to 30 June 2022
Nick Hewson Served throughout the year
Jon Austen Served throughout the year
Frances Davies Appointed 1 June 2022
Vince Prior Served throughout the year
Cathryn Vanderspar Served throughout the year
All of the above Directors remain in office at the date of this report.
Biographical details of the current Directors of the Company are shown on
pages 64 to 66.
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 any
directions given by the Company by special resolution.
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 page 70.
Directors' interests
The beneficial interests of the Directors and their closely connected persons
in the ordinary shares of the Company as at 30 June 2022 were as follows:
Number of shares Percentage of issued share capital
Nick Hewson 661,670 0.05%
Jon Austen 279,779 0.02%
Vince Prior 134,886 0.01%
Cathryn Vanderspar 91,738 0.01%
0
Frances Davies 0.00%
Appointment and replacement of Directors
All Directors retired and were re-elected at the AGM on 24 November 2021, with
the exception of Frances Davies who was appointed to the Board on 1 June 2022.
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' indemnification and insurance
The Company maintains £25 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 £30m on 19 July
2022 and continues in effect at the date of this report.
Political contributions
The Group made no political contributions during the year (2021: none).
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 2022.
Percentage of issued share capital
Number of shares
Evelyn Partners (formerly Smith & Williamson) 91,946,704 7.42%
Quilter Cheviot Investment Management 78,092,320 6.30%
Close Brothers Asset Management 72,417,780 5.84%
Waverton Investment Management 50,822,795 4.10%
BMO Global Asset Management (UK) 48,242,334 3.89%
Cazenove Capital Management 43,230,456 3.49%
Since the year end, and up to 20 September 2022, the Company has been notified
of the following interests in its ordinary shares in accordance with DTR 5.
The information provided is correct as at the date of notification:
Percentage of issued share capital
Number of shares
BlackRock Inc. 64,767,491 5.21%
Columbia Threadneedle Investments 61,728,272 4.98%
Waverton Investment Management 49,926,559 4.02%
Branches outside the UK
The Company has no branches outside the UK.
Financial instruments
The Group's exposure to, and management of, capital risk, market risk and
liquidity risk is set out in note 22 to the Group's financial statements.
Employees
The Group has no employees and therefore no employee share scheme or policies
for the employment of disabled persons or employee engagement.
Greenhouse gas emissions
The Group is considered to be a low energy user due to the fact it has no
Scope 1 or Scope 2 emissions and therefore is not required to make any
disclosures under the Streamlined Energy and Carbon Reporting Framework.
Information regarding Scope 3 emissions arising from the Group's activities
are included within the TCFD aligned report on pages 30 to 39.
Other disclosures
Disclosures of financial risk management objectives and policies and exposure
to financial risks are included in note 22 to the financial statements.
Details of future developments are included in the Strategic Report.
No additional disclosures are required in accordance with Listing Rule (LR)
9.8.4C R.
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.
Auditor
BDO LLP was appointed as auditor by the Directors in June 2017 and was last
re-appointed as auditor by the Company's Shareholders at the AGM held on 7
November 2021. BDO LLP have expressed their willingness to continue as auditor
for the financial year ending 30 June 2023. A resolution to appoint BDO LLP as
auditor of the Company will be proposed at the forthcoming AGM.
Change of control - 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.
Share capital structure
As at 30 June 2022, the Company's issued share capital consisted of
1,239,868,420 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 23 of the financial statements.
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 2021, Shareholders authorised the Company to make
market purchases of up to 147,641,558 Ordinary Shares or 14.99 per cent of the
Ordinary Shares in issue at that time. The Company has not repurchased any of
its ordinary shares under this authority, which is due to expire at the AGM in
2022 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 29 of the
consolidated financial statements.
Corporate Governance
The Company's statement on corporate governance can be found in the Corporate
Governance Report on pages 78 to 82 of his Annual Report. The Corporate
Governance Report forms part of this directors' report and is incorporated
into it by cross-reference.
Signed by order of the Board on 20 September 2022.
Nick Hewson
Chairman
20 September 2022
ALTERNATIVE INVESTMENT FUND MANAGER'S REPORT
Background
The Alternative Investment Fund Manager's 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 and as disclosed below and in
certain sections of the Strategic Report, those being the Chairman's
Statement, Investment Adviser's Report, The UK Grocery Market, Sustainability
and TCFD Aligned Report, the Directors' Report and Our Principal Risks
sections 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 Directors'
Report and in notes 20 and 22 to the financial statements.
3. Leverage and borrowing
The Company is entitled to employ leverage in accordance with its investment
policy and as described in the section entitled "POST BALANCE SHEET
HIGHLIGHTS", the Chairman's Statement, the section entitled "FINANCIAL
OVERVIEW" in the Strategic Report, and in notes 2, 20, 21 and 28 to the
financial statements. 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 (the "ESG
Framework") and a copy of the ESG Framework can be viewed on the AIFM's
website at
https://www.jtcgroup.com/wp-content/themes/jtcgroup/dist/img/review-2019/pdfs/esg.pdf
(https://www.jtcgroup.com/wp-content/themes/jtcgroup/dist/img/review-2019/pdfs/esg.pdf)
.
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 advisor respectively do consider ESG
matters in their respective capacities, as explained in SUPR's prospectus
dated 1 October, 2021, a copy of which can be found at 174243 Project Charlie
- Online Guide (supermarketincomereit.com)
(https://www.supermarketincomereit.com/_files/ugd/917ff8_600bdf373e0340c4a8922c37913f11a7.pdf)
, as updated by SUPR's supplementary prospectus dated 7 April, 2022, a copy of
which can be found at 77d474_705dd82df0b94e56b563d2685573b7ae.pdf
(supermarketincomereit.com)
(https://www.supermarketincomereit.com/_files/ugd/77d474_705dd82df0b94e56b563d2685573b7ae.pdf)
.
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 Sustainability and TCFD Aligned Report
included in the Strategic Report this annual financial report.
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.
As at the date of this report, one subsidiary of JTC Plc is currently a U.N.
Principles for Responsible Investment signatory. During the remainder of 2022
a project is underway to extend this across the JTC Group.
The AIFM is also 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 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 its executive directors, Graham Taylor, Gregory Kok and James
Tracey, because they were all employees of the JTC group of companies, of
which the AIFM forms part. Matthew Tostevin is a non-executive director and is
paid a fixed fee of £10,000 for acting as a director, attendance at all Board
meetings and work performed as a director of the Company in the ordinary
course of business. Subject to the prior approval of the Board of directors
on each occasion, Mr Tostevin is paid additional remuneration on a time spent
basis for services rendered to the Company which are not in the ordinary
course of business. 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 Company paid £10,000 in fixed fees and £20,982.50
in variable remuneration to its directors.
During the Company's financial year, Messrs Kok and Tracey resigned as
directors of the AIFM and Mr Kobus Cronje was appointed as a director. Mr
Cronje is not paid any separate remuneration for acting as a director of the
AIFM, because he is an employee of the JTC group of companies.
6. Remuneration of the AIFM Payable by the Company
The AIFM was during the year under review until 31 March, 2022 paid a fee of
0.04% per annum of the net asset value of the Company, subject to a minimum of
£50,000 per annum, such fee being payable quarterly in arrears. With effect
from 1 April, 2022, the AIFM reduced its fees on the net asset value of the
Company over £1 billion to 0.03% of the net asset value over £1 billion. The
total fees paid to the AIFM during the year under review were £327,413.15.
JTC Global AIFM Solutions Limited
Alternative Investment Fund Manager
20 September, 2022
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended 30 June 2022
Notes Year to Year to
30 June 2022 £'000 30 June 2021
£'000
Gross rental income 3 72,363 48,156
Service charge income 3 2,086 830
Service charge expense 4 (2,338) (1,044)
Net Rental Income 72,111 47,942
Administrative and other expenses 5 (13,937) (9,262)
Operating profit before changes in fair value of investment properties and 58,174 38,680
share of income from joint venture
Changes in fair values of investment properties and associated rent guarantees 12 21,820 36,288
Share of income from joint venture 14 43,301 15,506
Total share of income from joint venture 43,301 15,506
Operating profit 123,295 90,474
Finance expense 8 (12,992) (8,518)
Profit before taxation 110,303 81,956
Tax charge for the year 9 - -
Profit for the year 110,303 81,956
Items to be reclassified to profit or loss in
subsequent periods
Fair value movements in interest rate derivatives 20 5,566 1,569
Total comprehensive income for the year 115,869 83,525
Total comprehensive income for the year attributable 115,869 83,525
to ordinary Shareholders
Earnings per share - basic and diluted 10 11.3 pence 12.6 pence
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
As at 30 June 2022
Notes As at As at
30 June 2022 £'000 30 June 2021 £'000
Non-current assets
Property, plant and equipment 129 129
Investment properties 12 1,561,590 1,148,380
Investment in joint ventures 14 177,140 130,321
Contract fulfilment asset 17 93 85
Financial asset at amortised cost 16 10,626 -
Interest rate derivatives 20 5,114 763
Total non-current assets 1,754,692 1,279,678
Current assets
Financial assets held at fair value through profit and loss 15 283 237
Trade and other receivables 18 1,863 3,140
Cash and cash equivalents 51,200 19,579
Total current assets 53,346 22,956
Total assets 1,808,038 1,302,634
Non-current liabilities
Bank borrowings 21 348,546 409,684
Interest rate derivatives 20 - 1,210
Total non-current liabilities 348,546 410,894
Current liabilities
Deferred rental income 16,360 12,061
Trade and other payables 19 10,677 8,369
Total current liabilities 27,037 20,430
Total liabilities 375,583 431,324
Net assets 1,432,455 871,310
Equity
Share capital 23 12,399 8,107
Share premium reserve 23 494,174 778,859
Capital reduction reserve 23 778,859 -
Retained earnings 141,909 84,796
Cash flow hedge reserve 5,114 (452)
Total equity 1,432,455 871,310
Net asset value per share - basic and diluted 27 116 pence 108 pence
EPRA NTA per share 27 115 pence 108 pence
The consolidated financial statements were approved and authorised for issue
by the Board of Directors on 20 September 2022 and were signed on its behalf
by:
Nick Hewson
Chairman
20 September 2022
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the year ended 30 June 2022
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 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
For the year ended 30 June 2021
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 2020 4,735 436,126 (2,021) - 38,321 477,161
Comprehensive income for
the year
Profit for the year - - - - 81,956 81,956
Other comprehensive income - - 1,569 - - 1,569
Total comprehensive income for the year - - 1,569 - 81,956 83,525
Transactions with owners
Ordinary shares issued at a premium during the year 3,372 350,132 - - - 353,504
Share issue costs - (7,399) - - - (7,399)
Interim dividends paid - - - - (35,481) (35,481)
As at 30 June 2021 8,107 778,859 (452) - 84,796 871,310
CONSOLIDATED CASH FLOW
For the year ended 30 June 2022
Notes Year to Year to
30 June 2022 £'000 30 June 2021 £'000
Operating activities
Profit for the year (attributable to ordinary Shareholders) 110,303 81,956
Adjustments for:
Changes in fair value of investment properties and associated rent guarantees 12 (21,820) (36,288)
Movement in rent smoothing adjustments 3 (2,654) (1,998)
Finance expense 8 12,992 8,518
Share of income from joint venture 14 (43,301) (15,506)
Cash flows from operating activities before changes 55,520 36,682
in working capital
Decrease/(increase) in trade and other receivables 1,277 (1,437)
(Increase) / decrease in rent guarantee receivables (87) 185
Increase in deferred rental income 4,299 6,858
Increase in trade and other payables 2,004 516
Net cash flows from operating activities 63,013 42,804
Investing activities
Acquisition of contract fulfilment assets 17 (8) (85)
Acquisition of investment properties 12 (371,093) (541,210)
Acquisition of other financial assets 16 (10,626) (766)
Investment in joint venture 14 (3,518) (58,734)
Capitalised acquisition costs (17,603) (28,752)
Net cash flows used in investing activities (402,848) (629,547)
Financing activities
Proceeds from issue of Ordinary Share Capital 23 506,727 352,956
Costs of share issues 23 (10,366) (7,399)
Bank borrowings drawn 21 402,922 582,961
Bank borrowings repaid 21 (464,029) (298,300)
Loan arrangement fees paid (2,187) (3,211)
Bank interest paid (9,846) (5,578)
Bank commitment fees paid (681) (527)
Dividends paid to equity holders (51,084) (34,933)
Net cash flows from financing activities 371,456 585,969
Net movement in cash and cash equivalents in the year 31,621 (774)
Cash and cash equivalents at the beginning of the year 19,579 20,353
Cash and cash equivalents at the end of the year 51,200 19,579
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 The Scalpel 18th Floor, 52 Lime
Street, London, United Kingdom EC3M 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 2022 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 2022, with comparative figures
relating to the year to 30 June 2021, 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 2022. 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 2022 or 30 June 2021, 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 2021 have been delivered to
the Registrar of Companies and
those for the year ended 30 June 2022 will be delivered following the
Company's AGM. The auditors' reports on both the 30 June 2022 and 30 June
2021 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 significant impact of rising inflation, the energy crisis, the
Ukrainian conflict and supply-chain issues on the UK economy, and the retail
sector, 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 2022. In assessing the going
concern basis of accounting the Directors have had regard to the guidance
issued by the Financial Reporting Council.
During the year covered by this report, the Group raised a total of £506.7
million from the issue
of equity shares and a further £180.0m million of debt; being £150.0m under
the Barclays / RBC Bank facility and increases to the existing HSBC RCF and
Deka loan facility of £10.0m and £20.0m respectively (see note 21 for
further information). All financial covenants have been met to date.
In July 2022, the Company arranged a new £412.1 million unsecured with a bank
syndicate comprising Barclays, Royal Bank of Canada, Wells Fargo and Royal
Bank of Scotland International, of which £255 million was used to refinance
existing secured commitments (See note 29 for further information).
In September 2022, the HSBC RCF facility that was due to mature in August 2023
was extended by
a further two years to mature in August 2025.
The Group generated net cash flow from operating activities in the year of
£63.0 million, with its cash balances at 30 June 2022 totalling £51.2
million. The Group had no capital commitments or contingent liabilities as at
the year-end date.
As at the date of issuance of these consolidated financial information, all
contractual grocery rent for the March and June quarters has been collected in
full; similarly, over 99.5% from non-grocery units has been collected or
recovered under vendor provided rental guarantees.
The Group benefits from a secure income stream from its property assets that
are let to tenants with excellent covenant strength, and are critical to the
UK grocery infrastructure, under long leases that are subject to upward only
rent reviews.
£59.4 million of the Group's BLB loan facility falls due in July 2023. The
Directors' expect this facility to be refinanced in advance of its expiry
however it is also noted that the Group has sufficient headroom in its
existing facilities to repay this facility in full if required. As mentioned
above the Group successfully raised additional debt financing in July 2022.
As a result, the Directors believe that the Group is well placed to manage its
financing and other business risks and that the Group will remain viable,
continuing to operate and meet its liabilities for the foreseeable future,
being the period to 30 September 2023, which is at least a period of 12 months
from the date of approval of the financial information. The Directors are
therefore of the opinion that the going concern basis adopted in the
preparation of the financial information is appropriate.
Accounting convention and currency
The consolidated financial information (the "financial information") have been
prepared on a historical cost basis, except that investment properties, rental
guarantees and interest rate derivatives are 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, none of
which have had a material impact on the Group.
The Interest Rate Benchmark Reform - IBOR 'phase 2' amendments to IFRS 9, IAS
39, IFRS 7, IFRS 4 and IFRS 16 provide a practical expedient to account for
changes in the basis for determining contractual cash flows of financial
assets and financial liabilities as a result of IBOR reform. Under the
practical expedient, entities will account for these changes by updating the
effective interest rate using the guidance in paragraph B5.4.5 of IFRS 9
without the recognition of an immediate gain or loss. This practical expedient
applies only to such a change and only to the extent that it is necessary as a
direct consequence of interest rate benchmark reform, and the new basis is
economically equivalent to the previous basis.
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. The Group will review the further amendments when
they are issued (expected November 2022), at this stage, based on
communications from the IASB to date there is not expected to be a material
impact on the classification of liabilities as current or non-current on the
Statement of Financial Position
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 amendments were originally effective for periods beginning on or after 1
January 2022 which was then deferred to 1 January 2023.
The IASB has proposed further amendments in an exposure draft that was issued
in November 2021, as part of these further amendments the effective date is
proposed to be deferred to 1 January 2024. The Group will review the further
amendments when they are issued (expected November 2022), at this stage, based
on communications from the IASB to date there is not expected to be a material
impact on the classification of liabilities as current or non-current on the
Statement of Financial Position.
· Amendments to IFRS 3 Business Combinations and IAS 8 Accounting policies
(effective for periods beginning on or after 1 January 2022)
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 consolidated financial statements of the Group.
Significant accounting judgements, estimates and assumptions
The preparation of these 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 2022 or 30 June 2021.
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 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 £102m plus costs.
The joint venture also acquired 100% of the issued share capital in Cornerford
Limited for a combined total consideration of £115m 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,
with the cash proceeds expected to be received during the course of 2023. The
remaining 5 stores continue to be held as Investment Properties within the
Joint Venture.
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.
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 10 acquisitions. In 10 cases the
concentration test was applied and met, resulting in the acquisitions being
accounted for as asset purchases.
All £371.1 million of acquisitions during the year were accounted for as
asset purchases.
Key judgement: Acquisition of financial assets at amortised cost
The Group has acquired properties under a sale and leaseback arrangement. 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.
During the year, the Group acquired a property under a sale and leaseback
arrangement with a Big Four 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 comprise the financial information of
the Company and all of its subsidiaries drawn up to 30 June 2022.
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 are 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. 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.
2.5. 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.
2.6. 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.
2.7. 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.
2.8. 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.
2.9. Joint ventures
Interests in joint ventures are accounted for using the equity method of
accounting. 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.
2.10. 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.
2.11. 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. These are designated as hedging instruments for which hedge
accounting is being applied as under IAS 39. 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.
2.12. 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 23.
2.13. 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 2022 £'000 30 June 2021 £'000
Rental income - freehold property 44,332 29,679
Rental income - long leasehold property 28,031 18,477
Gross rental income 72,363 48,156
Year to Year to
30 June 2022 30 June 2021
£'000 £'000
Property insurance recoverable 449 251
Service charge recoverable 1,637 579
Total property insurance and service charge income 2,086 830
Total property income 74,449 48,986
Included within rental income is a £2,654,000 (2021: £1,998,000) 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 £34,420,000 (2021:
27,012,000) relating to the Group's largest tenant, £24,265,000 (2021:
£17,271,000) relating to the Group's second largest tenant and £6,272,000
(2021: £5,340,000) relating to the Group's third 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 2022 £'000 30 June 2021 £'000
Property insurance expenses 639 379
Service charge expenses 1,699 665
Total property insurance and service charge expense 2,338 1,044
5. Administrative and other expenses
Year to Year to
30 June 2022 £'000 30 June 2021 £'000
Investment Adviser fees (Note 28) 9,405 6,255
Directors' remuneration (Note 7) 269 260
Corporate administration fees 893 676
Legal and professional fees 2,249 916
Other administrative expenses 1,121 1,155
Total administrative and other expenses 13,937 9,262
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 profit
Operating profit is stated after charging fees for:
Year to Year to
30 June 2022 £'000 30 June 2021 £'000
Audit of the Company's consolidated and individual 190 155
financial statements
Audit of subsidiaries, pursuant to legislation 64 78
Total audit services 254 233
Audit related services: interim review 32 31
Total audit and audit related services 286 264
The Group's auditor also provided the following services in relation to the
placing of share capital, the fees for which have been recognised within
equity as a deduction from share premium:
Year to Year to
30 June 2022 £'000 30 June 2021 £'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 in connection - 90
with the October 2020 and May 2021 placings
Total other non-audit services 123 90
Total fees charged by the Group's auditor 409 354
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 2022 £'000 30 June 2021 £'000
Directors' fees 245 240
Employer's National Insurance Contribution 24 20
Total Directors' remuneration 269 260
The highest paid Director received £70,000 (2021: £70,000) for services
during the year.
8. Finance expense
Year to Year to
30 June 2022 £'000 30 June 2021 £'000
Interest payable on bank borrowings and hedging arrangements 9,565 5,810
Fair value adjustment of interest rate derivatives (Note 20) 296 706
Commitment fees payable 969 532
Amortisation of loan arrangement fees 2,157 1,442
Amortisation of interest rate derivative premium (Note 20) 5 28
Total finance expense 12,992 8,518
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 2022 £'000 30 June 2021 £'000
Total interest expense on financial liabilities held at amortised cost 11,723 7,252
Fee expense not part of effective interest rate for financial liabilities held 969 532
at amortised cost
Total finance expense 12,692 7,784
9. Taxation
A) Tax charge in profit or loss
Year to Year to
30 June 2022 £'000 30 June 2021 £'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 987 511
Total tax expense 987 511
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 profit before tax multiplied by the standard rate of
corporation tax for the year of 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 2022 £'000 30 June 2021 £'000
Profit on ordinary activities before taxation 110,303 81,956
Theoretical tax at UK standard corporation tax rate of 19% 20,958 15,572
Effects of:
Investment property revaluation not taxable (4,146) (6,895)
REIT exempt income (16,812) (8,677)
Share of tax expense of equity accounted joint ventures 987 511
Total tax expense for the year 987 511
UK REIT exempt income includes property rental income that is exempt from UK
corporation tax in accordance with Part 12 of CTA 2010.
10. Earnings per share
Earnings per share (EPS) amounts are calculated by dividing the profit or loss
for the year attributable to ordinary equity holders of the Company by the
weighted average number of ordinary shares in issue during the year. 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 and negative goodwill.
The calculation of basic, diluted and EPRA EPS is as follows:
(1) Based on the weighted average number of ordinary shares in issue
For the year ended 30 June 2022 Net profit attributable to ordinary Shareholders Weighted average number of ordinary shares Number Earnings/
£'000
per share
Pence
Basic and diluted EPS 110,303 975,233,858 11.3
Adjustments to remove:
Changes in fair value of investment properties and rent guarantees (21,820) - (2.2)
Group share of changes in fair value of joint venture investment properties 6,021 - 0.6
Group share of gain on disposal of joint venture investment properties (37,102) - (3.8)
EPRA EPS 57,402 975,233,858 5.9p
For the year ended 30 June 2021
Basic and diluted EPS 81,956 652,828,945 12.6
Adjustments to remove:
Changes in fair value of investment properties and rent guarantees (36,288) - (5.6)
Group share of changes in fair value of joint venture investment properties (5,619) - (0.9)
Group share of negative goodwill from joint venture investment (3,265) - (0.5)
EPRA EPS 36,784 652,828,945 5.6p
(1) Based on the weighted average number of ordinary shares in issue.
11. Dividends
Year to Year to
30 June 2022 £'000 30 June 2021 £'000
Amounts recognised as a distribution to ordinary Shareholders
in the year:
Dividends paid 53,190 35,481
On 8 July 2021, the Board declared a fourth interim dividend for the year
ended 30 June 2021 of 1.465 pence per share, which was paid on 7 August 2021
to Shareholders on the register on 16 July 2021.
On 23 September 2021 the Board declared a first interim dividend for the year
ended 30 June 2022 of 1.485 pence per share, which was paid on 16 November
2021 to Shareholders on the register on 8 October 2021.
On 10 January 2022, the Board declared a second interim dividend for the year
ended 30 June 2022 of 1.485 pence per share, which was paid on 25 February
2022 to Shareholders on the register on 21 January 2022.
On 6 April 2022, the Board declared a third interim dividend for the year
ended 30 June 2022 of 1.485 pence per share, which was paid on 27 May 2022 to
Shareholders on the register on 22 April 2022.
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. This has not been included as
a liability as at 30 June 2022.
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 2022 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 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
At 1 July 2020 244,030 295,380 539,410
Property additions 438,710 102,500 541,210
Capitalised acquisition costs 23,331 5,799 29,130
Revaluation movement 17,469 21,161 38,630
Valuation at 30 June 2021 723,540 424,840 1,148,380
There were 10 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 2022 is
£6,212,000 (2021: £3,558,000) 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:
12. Investment properties continued
Year to Year to
30 June 2022 £'000 30 June 2021 £'000
Revaluation movement per above 24,797 38,630
Rent smoothing adjustment (note 3) (2,654) (1,998)
Movements in associated rent guarantees (note 15) (323) (344)
Change in fair value recognised in profit or loss 21,820 36,288
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
Net initial yields of the Group's investment properties at 30 June 2022 range
from 3.8% to 6.6% (2021: 3.9% to 6.2%). Rental values (being passing rents or
ERV as relevant) on the Group's investment properties at 30 June 2022 range
from £0.3 million to £4.2 million (2021: £0.4 million to £4.8 million).
The table below analyses the sensitivity on the fair value of investment
properties for changes in rental values and net initial yields:
+1% -1% +0.25% Net Initial Yield -0.25%
Rental value Rental value £m Net Initial Yield
£m £m £m
(Decrease)/increase in the fair value of investment properties as at 30 June 15.6 (15.6) (81.1) 90.7
2022
(Decrease)/increase in the fair value of investment properties as at 30 June 11.5 (11.5) (58.8) 65.6
2021
13. Subsidiaries
The entities listed in the following table were the subsidiary undertakings of
the Company at 30 June 2022 all of which are wholly owned. All but one
subsidiary undertakings are incorporated in England with their registered
office at The Scalpel 18(th) Floor, 52 Lime Street, London, United Kingdom
EC3M 7AF. The remaining Company as stated below is incorporated in Jersey and
have a registered office of 28 Esplanade, St. Helier, JE2 3QA, Jersey.
Company name Holding type Nature of business
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 (Midco6) UK Limited Direct Intermediate parent company
SUPR Green Energy Limited Direct Energy provision 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
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 2022
** Subsidiaries acquired during the year ended 30 June 2022
^ Jersey registered entity
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
14. Investment in joint ventures
As at 30 June 2022 the Group has one joint venture investment. On the 28 May
2020, 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 £102m plus costs.
On the 17 February 2021, the joint venture also acquired 100% of the issued
share capital in Cornerford Limited for a combined total consideration of
£115m plus costs. Further amounts have been advanced in the year 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 mature 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.
The Group deems this to be a joint venture, as through the Group's interest in
Horndrift Limited and Cornerford Limited it indirectly has joint control of
the structure.
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"), has a carried interest entitlement over the investment returns from
the JV's investment in the Structure. Under the terms of the LPA, once the
Group and its JV partner have received a return equal to their total
investment in the JV plus an amount equivalent to a 10% per annum preferred
return on that investment, the Carry Partner is entitled to share in any
further cash returns to be distributed by the JV. The Carry Partner'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.
The Group has estimated the value of the Carry Partner's interest in the
Group's share of the JV as
at 30 June 2022 to be £7,500,000 (2021: £2,200,000). This has been
determined by reference to the expected returns from the JV's investment in
the Structure, assuming that the proceeds realised from the future sale of the
properties held by within the Structure are equal to the independent
valuations of those properties as at 30 June 2022. Accordingly, the Group's
beneficial interest in the JV, and therefore the Group's share of the JV's net
assets as at 30 June 2022, is estimated to amount to 47.9%.
The carried interest payments are only payable upon cash distributions from
the JV to the Group. To date there have been no cash distributions received by
the Group and therefore no carried interest payment has yet become payable.
Entity Partner Address and principal Ownership
place of business
Jersey British Airways Pensions Third Floor, Liberation 50%
Horner (Jersey) LP Trustees Limited House, Castle Street, St Helier, Jersey, JE1 2LH owned by the Group
Horner REIT Limited Third Floor, Liberation 100%
House, Castle Street, St Helier, Jersey, JE1 2LH owned by Horner (Jersey) LP
United Kingdom Langham Hall UK LLP, 100%
Horndrift Limited 1 Fleet Street, London, E4M 7RA owned by Horner REIT Limited
Cornerford Limited Langham Hall UK LLP, 100%
1 Fleet Street, London, E4M 7RA owned by Horner REIT Limited
Year to Year to
30 June 2022 30 June 2021
£'000 £'000
Opening balance 130,321 56,081
Acquired in the year 3,518 58,734
Negative goodwill arising on acquisition - -
Group's share of profit after tax 43,301 15,506
Closing balance 177,140 130,321
The joint venture entities have a 31 March year end. For accounting purposes
consolidated management accounts have been prepared for the joint venture for
the periods from acquisition to 30 June 2022 using accounting policies that
are consistent with those of the Group.
The financial statements of Horner (Jersey) LP prepared on this basis would be
as follows:
Statement of comprehensive income Year to 30 June 2022 Year to
£'000 30 June 2021
£'000
Share of income from joint venture 97,464 28,885
Negative goodwill - 6,530
Profit for the year and total comprehensive income 97,464 35,415
Group's share of profit for the year 43,301 15,506
Statement of financial position Year to 30 June 2022 Year to
£'000 30 June 2021
£'000
Investment in joint venture 369,280 265,045
Net assets 369,280 265,045
Group's share of net assets 177,140 130,320
Horner (Jersey) LP's share of the aggregate amounts recognised in the
consolidated statement of comprehensive income and statement of financial
position of the Structure are as follows:
Year to Year to
30 June 2022
30 June 2021
£'000
£'000
Rental income 12,878 19,886
Finance income 15,988 -
Administrative and other expenses (190) (585)
Change in fair value of investment properties (11,336) 13,259
Gain on disposal of investment properties 84,095 -
Operating profit 101,435 32,560
Finance expense (1,996) (2,470)
Profit before taxation 99,439 30,090
Tax charge for the period (1,974) (1,205)
Profit for the year 97,465 28,885
As at As at
30 June 2022
30 June 2021
£'000 £'000
Non-current assets
Investment properties 37,005 477,447
Total non-current assets 37,005 477,447
Current assets
Contractual receivable 530,481 -
Trade and other receivables 2,897 15,163
Cash and cash equivalents - -
Total current assets 533,378 15,163
Total assets 570,383 492,610
Non-current liabilities
Debt securities in issue 176,243 190,788
Interest rate derivative 3,451 8,836
Deferred tax 4,196 11,048
Other liabilities 9,883 9,188
Total non-current liabilities 193,773 219,860
Current liabilities
Trade and other payables 7,329 7,705
Total current liabilities 7,329 7,705
Total liabilities 201,102 227,565
Net assets 369,281 265,045
During the year, Sainsbury's exercised options to acquire 21 stores within the
Structure. The purchase price under the options is determined based on the
assumption of a new 20-year lease term at the higher of passing or open market
rent, subject to upward-only, five yearly market rent reviews. The purchase
price is subject to contractual negotiations and as at the year-end had not
been agreed.
As the year end, the Group determined that the exercise of the purchase
options by Sainsbury's Plc 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, with the cash
proceeds expected to be received during the course of 2023 as noted above.
In arriving at the valuation of the contractual receivable, the fair value of
the 21 properties subject to option exercise were valued as at 30 June 2022 by
the Group's independent valuer in accordance with the RICS Valuation -Global
Standards (the 'Red Book') given the absence of an agreed purchase option
price. This amount was adjusted based on future expected rental receipts
from the properties together with an indexation adjustment of the property
valuation over the last years based on the MSCI Supermarket Property Index as
per the terms of the contractual documents. The total of all these amounts was
then discounted to present value.
After the year end, the Company announced the purchase price on the 21 option
stores was formally agreed at £1,040 million. The purchase by Sainsbury's plc
is expected to complete between March 2023 and July 2023 on expiry of the
current leases.
Sainsbury's has agreed to retain occupation of 4 of the 5 remaining stores
within the Portfolio under a new 15-year lease agreement with five yearly open
market rent reviews and a tenant break at year 10. The JV has exclusivity to
purchase these stores for £68 million (excluding acquisition costs),
reflecting a net initial yield of 6%, which can be exercised upon expiry of
the current leases between March and July 2023. The remaining store is
expected to be sold in March 2023 subject to vacant possession.
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 2022 Year to
£'000 30 June 2021
£'000
At start of year 237 -
Additions 283 766
Fair value changes (including changes in estimated cash flows) (326) (344)
Collected during the year 89 (185)
Total financial assets held at fair value through profit and loss 283 237
at end of year
16. Financial assets held at amortised cost
Year to 30 June 2022 £'000 Year to
30 June 2021
£'000
At start of year - -
Additions 10,626 -
Amortisation - -
Impairment - -
Total financial asset held at amortised cost 10,626 -
On 8 June 2022, the Group acquired an Asda store in Carcroft, via a sale and
leaseback transaction for £10.6m, 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. The carrying value of
financial assets held at amortised cost approximates fair value.
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 2022. 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. Contract fulfilment assets
In the prior year, the Group was chosen to provide renewable electricity to
one of its tenants through the use of its acquired rooftop solar panels under
the terms of a Purchasing Power Agreement ("PPA"). It is intended that under
the terms of the PPA, the tenant will acquire 100% of the systems generated
power with a maximum 75% contracted under a take or pay arrangement and 25%
under a purchase option. The term of the PPA will be 20 years with a break
option coterminous with the occupational lease expiry. As at the year end, no
electricity under the PPA was provided to its tenant.
Under IFRS 15, the incremental costs of obtaining a contract with a customer
are recognised as a contract fulfilment asset if the costs are expected to be
recoverable. The Group has determined that the following costs may be
capitalised as contract fulfilment assets: i) legal fees to draft a contract
(once the Group has been selected as a preferred supplier for a bid) and ii)
any commissions payable that are directly related to winning a specific
contract.
Costs incurred prior to selection as preferred supplier are not capitalised
but are expensed as incurred.
Year to 30 June 2022 £'000 Year to
30 June 2021
£'000
At start of year 85 -
Additions 8 85
Amortisation -
Total contract fulfilment assets at end of year 93 85
In preparing this consolidated financial information, a review was undertaken
to identify indicators of impairment of contract fulfilment assets. As at the
year-end no such indicators were noted.
18. Trade and other receivables
As at As at
30 June 2022 £'000 30 June 2021
£'000
Other receivables 1,430 2,624
Prepayments and accrued income 433 516
Total trade and other receivables 1,863 3,140
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 2022. 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.
19. Trade and other payables
As at As at
30 June 2022 £'000 30 June 2021
£'000
Corporate accruals 8,958 6,153
VAT payable 1,719 2,216
Total trade and other payables 10,677 8,369
20. Interest rate derivatives
As at As at
30 June 2022 £'000 30 June 2021
£'000
Non-current asset: Interest rate swaps 5,114 763
Non-current liability: Interest rate swaps - (1,210)
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 2022 £'000 Year to
30 June 2021
£'000
At start of year (net) (447) (1,988)
Amortisation of cap premium in the year (note 8) (5) (28)
Changes in fair value of interest rate derivative in the year 5,270 863
Charge to the profit or loss (note 8) 296 706
Fair value at end of year (net) 5,114 (447)
To partially mitigate the interest rate risk that arises as a result of
entering into the floating rate debt facilities referred to in note 20, the
Group has entered derivative interest rate swaps in relation to the loan
facilities with Bayerische Landesbank ('the BLB swaps') and Wells Fargo Bank
('the Wells swap').
The total notional value of the BLB swaps was £86.9 million, which is equal
to the total amounts drawn under Bayerische Landesbank loan facility. The
terms of the BLB swaps coincide with the maturity of the respective Bayerische
Landesbank loan facility. The fixed interest rate of £52.1 million of the
swap exposure as at 30 June 2022 was 1.305%. The fixed interest rate of the
swaps of £27.5 million and £7.3 million for the remaining exposure of £34.8
million were 0.178% and 0.128% respectively.
The total notional value of the Wells swap was £30.0 million with its term
coinciding with the maturity of the Wells Fargo loan facility. The fixed
interest rate of the swap as at 30 June 2022 was 0.189%.
61% of the Group's outstanding debt as at 30 June 2022 was hedged through the
use of fixed rate debt or financial instruments as at 30 June 2022 (2021:
63%). 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 variable rate
linked loans. 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").
After the year end date, the Company took the decision to fix its interest
rate exposure by entering into interest rate swaps to hedge the Company's
£381 million of drawn unsecured debt for a weighted average term of 4 years.
100% of the Company's drawn debt is now hedged at an effective fixed rate of
2.6% (including margin). The cost of acquiring the hedges was £35.2 million
which will immediately impact EPRA NTA by 2.8 pence per share.
21. Bank borrowings
As at As at
30 June 2022 £'000 30 June 2021
£'000
Amounts falling due after more than one year:
Secured debt 352,213 413,320
Less: Unamortised finance costs (3,667) (3,636)
Bank borrowings per the consolidated statement of financial position 348,546 409,684
A summary of the Group's borrowing facilities as at 30 June 2022 are shown
below:
Lender Facility Expiry Credit margin Variable Loan commitment £m^ Amount drawn 30 June 2022 £m
HSBC Revolving credit facility Aug 2025* 1.65% SONIA £100.0 Nil
HSBC Revolving credit facility Aug 2025* 1.75% SONIA £50.0 Nil
Deka Term Loan Aug 2026* 1.89% £47.6 £47.6
Deka Term Loan Aug 2026* 2.05% £28.9 £28.9
Deka Term Loan Aug 2026* 1.72% £20.0 £20.0
BLB Term Loan Jul 2023 1.25% SWAP (Note 20) £52.1 £52.1
BLB Term Loan Aug 2025 1.85% SWAP (Note 20) £27.5 £27.5
BLB Term Loan Jul 2023 1.85% SWAP (Note 20) £7.3 £7.3
Wells Fargo Revolving credit facility Jul 2027* 2.00% SWAP (Note 20) £30.0 £30.0
Wells Fargo Revolving credit facility Jul 2027* 2.11% SONIA £30.0 Nil
Wells Fargo Revolving credit facility Sep 2023 1.40% SONIA £100.0 Nil
Barclays Revolving credit facility Jan 2026* 1.50% SONIA £300.0 £138.8
Total £793.4 £352.2
*Includes extension options
^Includes uncommitted accordions
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.
As disclosed in note 1, the Group has adopted Interest Rate Benchmark Reform -
IBOR 'phase 2'. Applying the practical expedient introduced by the amendments,
when the benchmarks affecting the credit facility and the BLB loan facility
were transitioned from LIBOR to SONIA the adjustments to the contractual cash
flows have been reflected as an adjustment to the effective interest rate.
Therefore, the replacement of the loans' benchmark interest rate has not
result in an immediate gain or loss recorded in profit or loss.
Each of the Group's facilities impacted by the changes resulting from interest
rate benchmark reform transitioned during the period and the Group does not
consider that the transition from LIBOR to SONIA within the Group's floating
rate facilities gives rise to a significant change in market risk.
22. Categories of financial instruments
As at As at
30 June 2022 £'000 30 June 2021
£'000
Financial assets
Financial assets at amortised cost:
Lease Receivables 10,626 -
Cash and cash equivalents 51,200 19,579
Trade and other receivables 1,430 2,624
Financial assets at fair value:
Rent guarantees 283 237
Derivatives in effective hedges:
Interest rate derivative 5,114 763
Total financial assets 68,653 23,203
Financial liabilities
Financial liabilities at amortised cost:
Secured debt 348,546 409,684
Trade and other payables 8,958 6,153
Derivatives in effective hedges:
Interest rate derivative - 1,210
Total financial liabilities 357,504 417,047
At the year end, all financial assets and liabilities were measured at
amortised cost except for the interest rate derivatives and rental guarantees
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 20.
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 20 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 LIBOR and the
SONIA daily rate, was as follows:
Year to Year to
30 June 2022 30 June 2021 £'000
£'000
Effect on profit 413 356
Effect on other comprehensive income and equity (223) (376)
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 2022 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 resulting from any upward rent reviews.
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.
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 2022 rate. Interest
rate derivatives are shown at fair value and not at their gross undiscounted
amounts.
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
As at 30 June 2021
Financial assets:
Cash and cash equivalents 19,579 - - - 19,579
Trade and other receivables 2,624 - - - 2,624
Rent guarantees 237 - - - 237
Interest rate derivatives - - 763 - 763
Total financial assets 22,440 - 763 - 23,203
Financial liabilities:
Bank borrowings 6,153 111,962 312,366 - 430,481
Trade payables and other payables 6,153 - - - 6,153
Interest rate derivatives - - 1,210 - 1,210
Total financial liabilities 12,306 111,962 313,576 - 437,844
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 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. The
Group does not provide any cross-group guarantees nor does the Company act as
a guarantor to the lending bank.
At 30 June 2022, the capital structure of the Group consisted of bank
borrowings (note 21), 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 23 and 24).
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
Bank borrowings due in more than 1 year £'000 Interest and commitment fees payable £'000 Interest rate derivatives £'000 Total
£'000
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)
As at 30 June 2022 348,546 1,939 (5,114) 345,371
As at 1 July 2020 126,791 692 1,988 129,471
Cash flows:
Debt drawdowns in the year 582,961 - - 582,961
Debt repayments in the year (298,300) - - (298,300)
Interest and commitment fees paid - (6,105) - (6,105)
Loan arrangement fees paid (3,211) - - (3,211)
Non-cash movements:
Finance costs in the statement of comprehensive income 1,443 7,047 28 8,518
Fair value changes - - (1,569) (1,569)
At 30 June 2021 409,684 1,634 447 411,765
Movements in respect to share capital are disclosed in note 23 below.
The interest and commitment fees payable are included within the corporate
accruals balance in note 19. 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 20.
23. 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 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
As at 1 July 2020 473,620,462 4,735 436,126 - 440,861
Ordinary shares issued and fully paid - 9 October 2020 192,307,692 1,923 198,077 - 200,000
Scrip dividends issued and fully paid 124,795 2 132 - 134
- 26 February 2021
Ordinary shares issued and fully paid - 23 March 2021 144,297,503 1,443 151,513 - 152,956
Scrip dividends issued and fully paid 369,716 4 410 - 414
- 21 May 2021
Share issue costs - - (7,399) - (7,399)
As at 30 June 2021 810,720,168 8,107 778,859 - 786,966
Share allotments and other movements in relation to the capital of the Company
in the year:
On 22 October 2021 the Company completed an equity fundraising and issued an
additional 173,913,043 ordinary shares of one pence each at a price of £1.15
per share. The consideration received in excess of the par value of the
ordinary shares issued, net of total capitalised issue costs, of £193.8
million was credited to the share premium reserve.
Following a successful application to the High Court and lodgement of the
Company's statement of capital with the Registrar of Companies, the Company
was permitted to reduce the capital of the Company by an amount of £778.9
million. This was effected on 15 December 2021 by a transfer of that amount
from the share premium reserve to the capital reduction reserve. The capital
reduction reserve is classed as a distributable reserve.
On 29 April 2022 the Company completed an equity fundraising and issued an
additional 253,492,160 ordinary shares of one pence each at a price of £1.21
per share. The consideration received in excess of the par value of the
ordinary shares issued, net of total capitalised issue costs, of £298.3
million was credited to the share premium reserve.
Scrip dividends were issued on 20 August 2021, 16 November 2021, 25 February
2021 and 27 May 2022 at a reference price of £1.17, £1.16, £1.23 and £1.25
per share respectively. The Company issued a combined total of 1,743,049
shares under the scrip dividend programme during the year. The consideration
received in excess of the par value of the ordinary shares issued, of £2.1
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 2022 total was 1.24 billion.
24. Reserves
The nature and purpose of each of the reserves included within equity at 30
June 2022 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.
25. Capital commitments
The Group had no capital commitments outstanding as at 30 June 2022 and 30
June 2021.
26. 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 2022 is 15.1 years (2021: 14.8 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 2022 30 June 2021
£'000 £'000
Within one year 77,438 57,348
Between one year and five years 307,774 231,448
More than five years 834,128 612,471
Total 1,219,340 901,267
27. 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 2022 30 June 2021
£'000 £'000
Net assets per the consolidated statement of financial position 1,432,455 871,310
Intangibles (93) (85)
Fair value of financial assets at amortised cost (666) -
Fair value of interest rate derivatives (5,114) 447
EPRA NTA 1,426,582 871,672
Ordinary shares in issue at 30 June 1,239,868,420 810,720,168
NAV per share - Basic and diluted (pence) 116p 108p
EPRA NTA per share (pence) 115p 108p
28. 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, Chairman of the Board of Directors of the Company, is paid fees
of £70,000 per annum, with the other Directors each being paid fees of
£50,000 per annum. Jon Austen is paid an additional £7,500 per annum for his
role as chair of the Company's Audit Committee, Vince Prior is paid an
additional £2,500 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.
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
2022 were as follows:
· Nick Hewson: 661,670 shares (0.05% of issued share capital)
· Jon Austen: 279,779 shares (0.02% of issued share capital)
· Vince Prior: 134,886 shares (0.01% of issued share capital)
· Cathryn Vanderspar: 91,738 (0.01% 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: 1,086,670 shares (0.09% of issued share capital)
· Jon Austen: 305,339 shares (0.02% of issued share capital)
· Vince Prior: 151,923 shares (0.01% of issued share capital)
· Cathryn Vanderspar: 108,645 (0.01% 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 2022 the total advisory fees payable to the Investment
Adviser were £9,404,938 (2021: £6,255,423) of which £1,446,246 (2021:
£1,463,898) 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: £51,500; plus (i) £4,175 for any
indirect subsidiary of the Company and (ii) £1,620 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 2022 the total accounting and administration service
fee payable to the Investment Adviser was £237,559 (2021: £64,920) of which
£81,833 (2021: £52,646) 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 2022 the total introducer fees payable to the
affiliate of the Investment Adviser were £271,239 (2021: £269,172).
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 2022 were as follows:
· Ben Green: 1,199,938 shares (0.10% of issued share capital)
· Steve Windsor: 1,319,486 shares (0.11% of issued share capital)
· Steven Noble: 204,130 shares (0.02% of issued share capital)
· Natalie Markham: 52,529 shares (0.00% 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"), has 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.
The carried interest payments are only payable to the extent that
distributions are made from the JV
to the Group. To date there have been no cash distributions received by the
Group and therefore no carried interest payment has yet become payable.
29. Subsequent events
Debt financing
· 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.
This consists of:
o A £250 million five-year revolving credit facility at a margin of 1.5%
over SONIA, with two further one-year extension options;
o A £100 million three-year term loan at a margin of 1.5% over SONIA, with
two further one-year extension options;
o A £62.1 million eighteen-month term loan at a margin of 1.5% over SONIA,
with one further eighteen-month extension option.
· In July 2022, the new unsecured facility was used to refinance the
following existing secured facilities:
o A reduction of the Barclays/RBC facility of £300.0 million including
uncommitted accordion options to £77.5 million;
o A reduction of the Wells Fargo facility of £160.0 million including
uncommitted accordion options to £39.0 million.
· In September 2022, the Group announced a two-year extension to its
revolving credit facility with HSBC, inclusive of a one-year accordion option
at lender's discretion.
Hedging
· After the year end date, the Company took the decision to fix its
interest rate exposure by entering into interest rate swaps to hedge the
Company's £381 million of drawn unsecured debt for a weighted average term of
4 years. 100% of the Company's drawn debt is now hedged at an effective fixed
rate of 2.6% (including margin). The cost of acquiring the hedges was £35.2
million which will immediately impact EPRA NTA by 2.8 pence per share.
Acquisitions
· In July 2022, the Group announced the acquisition of a Tesco
superstore, M&S Foodhall and an Iceland in Chineham, Basingstoke with
non-grocery units for £72.9 million (excluding acquisition costs). The Tesco
superstore has a 12-year unexpired lease term and is subject to 5-yearly open
market rent reviews.
· In August 2022, the Group announced the acquisition of a Sainsbury's
supermarket and an M&S Foodhall in Glasgow with non-grocery units for
£34.5 million (excluding acquisition costs). The unexpired lease terms of
the two stores are 10 and 4 years respectively and are both subject to
5-yearly upwards only, open market rent reviews.
· In August 2022, the Group announced the acquisition of a Tesco in
Newton-le-Willows, Merseyside for £16.6 million (excluding acquisition
costs). The store has a 12-year unexpired lease term and is subject to annual
RPI-linked rental uplifts
· In August 2022, the Group announced the acquisition of a Tesco in
Bishops Cleeve, Cheltenham for £25.4 million (excluding acquisition costs).
The store has a 12-year unexpired lease term and is subject to annual
RPI-linked rental uplifts.
· In September 2022, the Group announced the acquisition of a Tesco
supermarket in Llanelli, South Wales for £66.8 million (excluding acquisition
costs). The store has a 12-year unexpired lease term and is subject to annual,
upwards only RPI linked rent reviews.
Joint Venture investment
· After the year end, the Company announced the purchase price on the
21 option stores was formally agreed at £1,040 million. The purchase by
Sainsbury's plc is expected to complete between March 2023 and July 2023 on
expiry of the current leases.
· Sainsbury's has agreed to retain occupation of 4 of the 5 remaining
stores within the Portfolio under a new 15-year lease agreement with five
yearly open market rent reviews and a tenant break at year 10.
· The JV has exclusivity to purchase these stores for £68 million
(excluding acquisition costs), reflecting a net initial yield of 6%, which can
be exercised upon expiry of the current leases between March and July 2023.
The remaining store is expected to be sold in March 2023 subject to vacant
possession.
UNAUDITED SUPPLEMENTARY INFORMATION
Notes to EPRA and other Key Performance Indicators
1. EPRA Earnings per Share
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 / (loss) 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 gain on disposal of joint venture investment properties (37,102) - (3.8p)
EPRA EPS 57,402 975,233,858 5.9p
1 Based on the weighted average number of ordinary shares in issue in the
year ended 30 June 2022.
For the period from 1 July 2020 to 30 June 2021 Net profit attributable Weighted average number of ordinary shares(1) Earnings/
to ordinary Shareholders
Number per share
£'000
Pence
Net profit / (loss) attributable to ordinary Shareholders 83,526 652,858,945 12.8p
Adjustments to remove:
Changes in fair value of interest rate derivatives (1,570) - (0.2p)
Changes in fair value of investment properties and associated rent guarantees (36,288) - (5.6p)
Group share of changes in fair value of joint venture investment properties (5,619) - (0.9p)
Group share of negative goodwill from joint venture investment (3,265) - (0.5p)
EPRA EPS 36,784 652,858,945 5.6p
2 Based on the weighted average number of ordinary shares in issue in the
year ended 30 June 2021.
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 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
30 June 2021 EPRA NTA EPRA NRV EPRA NDV £'000
£'000 £'000
IFRS NAV attributable to ordinary Shareholders 871,310 871,310 871,310
Fair value of interest rate derivatives 447 447 447
Intangibles (85) - -
Purchasers' costs - 83,787 -
Fair value of debt - - (2,111)
EPRA metric 871,672 955,544 869,646
EPRA metric per share 108p 118p 107p
3. EPRA Net Initial Yield (NIY) and EPRA "topped up" NIY
As at As at
30 June 2022 £'000 30 June 2021 £'000
Investment Property - wholly owned (note 12) 1,561,590 1,148,380
Investment Property - share of joint ventures 266,500 233,125
Completed Property Portfolio 1,828,090 1,381,505
Allowance for estimated purchasers' costs 133,380 100,797
Grossed up completed property portfolio valuation (B) 1,961,470 1,482,302
Annualised passing rental income - wholly owned 77,230 57,754
Annualised passing rental income - share of joint venture 13,372 13,239
Annualised non-recoverable property outgoings (400) (482)
Less: contracted rent under rent free periods - -
Annualised net rents (A) 90,202 70,511
Rent expiration of rent-free periods and fixed uplifts 56 -
Topped up annualised net rents (C) 90,258 70,511
EPRA NIY (A/B) 4.60% 4.76%
EPRA "topped up" NIY (C/B) 4.60% 4.76%
4. EPRA Vacancy Rate
EPRA Vacancy Rate As at As at
30 June 2022 £'000 30 June 2021 £'000
Estimated rental value of vacant space 188 238
Estimated rental value of the whole portfolio 77,237 57,762
EPRA Vacancy Rate 0.2% 0.4%
5. EPRA Cost Ratio
As at As at
30 June 2022 £'000 30 June 2021 £'000
Administration expenses per IFRS 13,937 9,262
Service charge income (2,086) (830)
Service charge costs 2,338 1,044
Net Service charge costs 252 214
Share of joint venture expenses 95 292
Total costs (including direct vacant property costs) (A) 14,284 9,768
Vacant property costs (99) (187)
Total costs (excluding direct vacant property costs) (B) 14,185 9,581
Gross rental income per IFRS 72,363 48,156
Less: service charge components of gross rental income - -
Add: Share of Gross rental income from Joint Ventures 14,423 9,944
Gross rental income (C) 86,786 58,100
EPRA Cost ratio (including direct vacant property costs) (A/C) 16.46% 16.81%
EPRA Cost ratio (excluding vacant property costs) (B/C) 16.34% 16.49%
6. EPRA LTV
The Group voluntarily adopted the EPRA issued new best practice reporting
guidelines in the year ending 30 June 2022, 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 2022 30 June 2022
£'000 £'000
Group Net Debt
Borrowings from financial institutions 348,546 409,684
Net payables 24,893 17,053
Less: Cash and cash equivalents (51,200) (19,579)
Group Net Debt Total (A) 322,239 407,158
Group Property Value
Investment properties at fair value 1,561,590 1,148,380
Intangibles 93 85
Financial assets 10,626 -
Total Group Property Value (B) 1,572,309 1,148,465
Group LTV (A-B) 20.49% 35.45%
Share of Joint Ventures Debt
Bond loans 88,121 95,394
Net payables 822 865
JV Net Debt Total (A) 88,943 96,259
Group Property Value
Owner-occupied property
Investment properties at fair value 277,407 238,724
Total JV Property Value (B) 277,407 238,724
JV LTV (A-B) 32.06% 40.32%
Combined Net Debt (A) 411,182 503,417
Combined Property Value (B) 1,849,717 1,387,189
Combined LTV (A-B) 22.23% 36.29%
7. Total Shareholder Return
Total Shareholder Return Year to Year to
30 June 2022 Pence per share 30 June 2021 Pence per share
Share price at start of the year 117.50 111.4
Share price at the end of the year 119.50 117.5
Increase in share price 2.00p 6.1p
Dividends declared for the year 5.94p 5.86p
Increase in share price plus dividends 7.94p 11.96p
Share price at start of year 117.50p 111.4p
Total Shareholder Return 7% 11%
8. 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 2022 £'000 30 June 2021 £'000
Bank borrowings 348,546 409,684
Less cash and cash equivalents (51,200) (19,579)
Net borrowings 297,346 390,105
Investment properties valuation 1,561,590 1,148,380
Net loan to value ratio 19% 34%
9. Annualised passing rent
Annualised passing rent is the annualised cash rental income being received as
at the stated date.
COMPANY INFORMATION
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 International 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
Reversionary Portfolio
Total Shareholder Return 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
Directors Nick Hewson (Non-Executive Chairman)
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)
Company Secretary JTC (UK) Limited
The Scalpel, 52 Lime Street, 18th Floor, London,
EC3M 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
Broker and Placing Agent 150 Cheapside, London, EC2V 6ET
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 The Scalpel
52 Lime Street, 18th Floor, London, EC3M 7AF
Stock exchange ticker ISIN SUPR
GB00BF345X11
This report will be available on the Company's website.
END
1 The alternative performance measures used by the Group have been defined
and reconciled to the IFRS financial statements within the unaudited
supplementary information
2 Calculated as EPRA earnings divided by dividends paid during the year
3 Includes the Q4 2022 interim dividend paid on 22 August 2022
4 Includes property acquisition recognised as financial asset at amortised
cost under IFRS
5 Includes property acquisition recognised as financial asset at amortised
cost under IFRS
6 Inclusive of uncommitted accordion options
7 Includes the Company's investment in the Sainsbury's Reversion Portfolio
8 Inflation linked leases are subject to annual floors and caps
9 Includes property acquisition recognised as a financial asset at amortised
cost under IFRS
10 Office for National Statistics
11 Kantar: September 2022
12 Kantar: August 2022
13 Atrato Capital research
14 Atrato Capital research
15 Profits which are not derived from property rental business would be
subject to corporation tax
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