Supermarket Income REIT making all the right moves

In the face of the market persistently discounting their shares relative to net assets over the past couple of years, most self-respecting investment trust boards have tried various strategies to close the gap.

Supermarket Income REIT PLC (LSE:SUPR, OTC:SUPIF) has done what several others have discussed but rarely delivered - it has parted ways with its external investment manager and brought the team in-house.

Rob Abraham and Mike Perkins, previously running the show from outside, have joined the board as chief executive and chief financial officer, respectively.

The move trims costs by £4 million a year, equivalent to a 5% uplift in earnings per share. The £19.7 million break-up cost was funded using part of the £63.5 million sale of a Tesco store in Newmarket back to the supermarket group.

Cost ratio falling

With a target cost ratio below 9%, analysts say the shift gives SUPR one of the lowest EPRA cost ratios in the sector.

The board weighed several options but decided internalising management was a more effective use of capital, promising better returns than share buybacks favoured by other London-listed investment companies.

SUPR said the change also better aligns managers with shareholder interests and provides greater strategic flexibility.

Chair Nick Hewson called the move “a significant milestone” for the company but said it is just one of a series of strategic initiatives aimed at boosting earnings and narrowing the discount to NAV.

Premium price

New CEO Abraham noted the Tesco store sale that funded the internalisation was completed at a 7% premium to its book value. This “recycling” of assets is one of several initiatives he and Perkins have been pursuing.

“Another area of progress is lease renewals,” he said, pointing out that the three shortest leases in the portfolio have been extended to 15 years, with rents 35% above the MSCI supermarkets benchmark. 

“This reinforces the value of these assets and the benefits of owning top-performing stores, which command higher rents.”

The board’s efforts were praised by Stifel’s investment trust analysts, who described the internalisation as “unequivocally positive for the shares”.

Stifel also dropped its prior assumption that SUPR would make £75 million in acquisitions in the second half of the year, now believing “the company does not need to deploy capital, which would be largely debt-financed, in order to generate rental income”.

Comfortable

The portfolio’s loan-to-value ratio is expected to remain “comfortably” below the 40% threshold, with Stifel now forecasting it will peak at 36% by 2027 - down from previous estimates of 41%.

As a REIT, SUPR is naturally appealing to income-focused investors, and alongside the lower cost ratio, it also offers a well-covered and progressive dividend.

Analysts at Peel Hunt say recent activity by the board and managers “looks likely to lead to meaningful earnings accretion, with the dividend now set to be fully covered”, while Stifel forecasts it will continue to grow for at least the next five years.

With a dividend yield approaching 8%, income investors could ask for little more, particularly in a market environment clouded by tariff-related uncertainty in other sectors.

Following the internalisation, Peel Hunt said it had “more confidence in future dividend cover”, raised its share price target from 70p to 85p and upgraded its recommendation from ‘hold’ to ‘add’. 

Stifel reiterated its ‘buy’ rating and lifted its price target from 80p to 90p.

Do your homework

Still, after all that praise, a few cautionary notes. Readers should always do their own due diligence; I can only present the facts as they stand. A bit of deeper digging is always wise.

SUPR is no one-way bet. While the fundamentals may point to a clear valuation anomaly, markets are far from rational right now and are unlikely to stabilise until the uncertainty around Trump's roll-of-the-dice on tariffs plays out.

That said, property, particularly a play underpinned by the defensive grocery sector, isn’t the worst place to anchor in choppier economic waters. Worth keeping an eye on.