Supermarket Income REIT plc

(the "Group" or the "Company")

LEI: 2138007FOINJKAM7L537

INTERIM RESULTS FOR THE SIX MONTHS ENDED 31 DECEMBER 2021

GROCERY SECTOR STRENGTH AND INFLATIONARY TAILWINDS PROVIDE SUPPORTIVE BACKDROP FOR SUPERMARKET INCOME REIT

The Board of Directors of Supermarket Income REIT plc (LSE: SUPR), the real estate investment trust providing secure, inflation-protected, long income from grocery property in the UK, is today reporting its interim results for the Group for the six months ended 31 December 2021 (the "Period").

FINANCIAL HIGHLIGHTS

·     48% Total Shareholder Return since the initial listing in July 2017[1]

·     On track to deliver full-year 2022 target dividend of 5.94 pence per share

·     Direct Portfolio independently valued at £1,413.5 million, increasing by £265.1 million for the Period following valuation growth of £21.7 million and new acquisitions of £243.4 million (excluding acquisition costs)

o   2% valuation growth on a like-for-like basis for the Period

o   Direct Portfolio net initial yield ("NIY") of 4.7%

o   Direct Portfolio weighted unexpired lease term ("WAULT") of 15 years

·     Annualised passing rent increased by 52% to £70.2 million following rent reviews and new acquisitions during the Period

·     Value of investment in the Sainsbury's Reversion Portfolio increased by £37.2 million to £167.5 million, following the exercise of purchase options by Sainsbury's

·     EPRA NTA per share increased by 5 pence in the Period to 113 pence as at 31 December 2021

BUSINESS HIGHLIGHTS IN THE PERIOD

·     Further portfolio growth through the deployment of £200.0 million of equity raised via an upsized and over-subscribed Placing and Offer for Subscription in October 2021

·     Acquisition of eight omnichannel supermarkets at an aggregate purchase price of £243.4 million (excluding acquisition costs)

o   New acquisitions weighted average NIY of 4.5%

o   New acquisitions WAULT of 16 years

·     Seven rent reviews, adding £0.9 million annualised rental income, and a lease regear completed

·     Sainsbury's exercised its first option to acquire 13 supermarkets in the Sainsbury's Reversion Portfolio

POST BALANCE SHEET HIGHLIGHTS

·     Migration of the Group's listing to the Premium Segment of the FCA's Official List and London Stock Exchange's Main Market, from the Specialist Fund Segment

·      Fitch Ratings Limited ("Fitch") Investment Grade credit rating of BBB+ assigned to the Group 

·      Purchase of three omnichannel supermarkets for £128.3 million (excluding acquisition costs)

o  New acquisitions weighted average NIY of 4.8%

o  New acquisitions WAULT of 19 years

·      Active asset management led to a lease regear of the Tesco supermarket in Leicester 

·      85% of rental income for the Direct Portfolio directly linked to inflation  

·     Sainsbury's exercised its second option to acquire eight further stores in the Sainsbury's Reversion Portfolio, acquiring in total 21 of 26 stores upon current lease expiry in mid-2023

Nick Hewson, Chairman of Supermarket Income REIT plc, commented:

"I am very pleased to be reporting another strong set of results for the Group which reflect significant growth in the Period. 

We have continued to diversify our portfolio by sourcing and acquiring high quality omnichannel supermarket properties that represent the future model of grocery in the UK. We are delighted to have achieved the strategic milestones of becoming a Premium Segment listed company and receiving an Investment Grade credit rating, demonstrating both the strength and maturity of our business. Since our IPO in July 2017, we have delivered a Total Shareholder Return of 48% for our shareholders.

In this highly inflationary environment, our portfolio offers investors secure, long-term, inflation-protected income that is backed by one of the most compelling real estate asset classes in the UK investment market." 

PRESENTATION FOR ANALYSTS

A presentation to analysts will take place today at 08.30am.

Webcast details are as follows:

https://webcasting.brrmedia.co.uk/broadcast/6203c5f6636d105baf47a366

The results presentation is available in the Investor Centre section of the Group's website. For further details, please email Dido Laurimore at SupermarketIncomeREIT@fticonsulting.com 

NOTES TO EDITORS:

Supermarket Income REIT plc (LSE: SUPR) is a real estate investment trust dedicated to investing in grocery properties which are an essential part of the UK's feed the nation infrastructure. The Group focuses on grocery stores which are omnichannel, fulfilling online and in-person sales. All of the Group's 67 supermarkets⁽¹⁾ are let to leading UK supermarket operators, diversified by both tenant and geography.

The Group provides investors with secure, inflation-protected, long income with the potential for capital appreciation over the longer term and targets a 7% to 10% p.a. Total Shareholder Return over the medium term⁽²⁾. Atrato Capital Limited is the Group's Investment Adviser.

Further information is available on the Group's website www.supermarketincomereit.com 

1.     41 directly owned supermarkets, plus 26 via joint venture 

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

CHAIRMAN'S STATEMENT

Dear Shareholder,

I am delighted to report to you another period of strategic progress and strong financial performance for the Group. During the Period we have delivered a 5 pence increase in our EPRA NTA per share, from 108 pence per share to 113 pence per share as at 31 December 2021. We have also successfully deployed the proceeds of our oversubscribed equity raise of £200 million in October 2021, acquiring a further £372 million of supermarket property assets2.

Since our IPO in July 2017, we have grown our investment portfolio to £1.6 billion and delivered a Total Shareholder Return of 48%.

Our strategy is to invest in omnichannel supermarkets which we firmly believe is the future model of grocery retailing in the UK. Omnichannel supermarkets operate both as physical supermarkets and as online fulfilment centres performing a critical role in the business strategies of our tenants.

Over the past two years UK grocery sales have materially increased above pre-pandemic levels. This reflects the lasting impact of changes to working habits on the UK grocery market. Kantar's January 2022 grocery sales data demonstrates the full extent of this impact, with UK grocery sales remaining 10% higher than pre-pandemic levels, despite the gradual re-opening of the economy.

Our omnichannel stores have captured an outsized share of the increase in grocery demand as the growth in online sales fulfilled from stores has significantly exceeded that of the overall market.

Against this backdrop we have seen record levels of capital investment in the UK grocery sector. In October 2021 Clayton, Dubilier & Rice completed the £7 billion takeover of Morrisons, following on from Asda's £7 billion takeover by EG & TDR Capital in February of the same year. The managers of global equity capital clearly believe it is the right time in the cycle to make strategic investments in this space to capitalise on the strong underlying fundamentals of the asset class, combined with post-pandemic changes in consumer habits and the growth in online shopping.

In January 2022, Colliers highlighted that UK supermarket property investment volumes in 2021 were once again over £1.8 billion  (2020: £1.8 billion). This continuing investment interest has resulted in supermarket property yields compressing, supporting our long-term investment thesis.

Our Direct Portfolio of investment properties was independently valued on 31 December 2021 at £1,413.5 million, reflecting a 2% like-for-like growth in value during the Period. A key focus of the investment market remains mitigating the impact of higher inflation. In that regard, we are especially pleased to have built a portfolio benefiting from long, index linked, leases, with 85% of our rental income directly linked to inflation3.  The grocery sector is particularly resilient in an inflationary environment, with an ability to pass on supply chain cost pressures through price increases. Our rents remain highly affordable with average rent to turnover across our portfolio of approximately 4%4.

The Group achieved two significant strategic milestones after the balance sheet date. Firstly, Supermarket Income REIT is now listed on the Premium Segment of the FCA's Official List and the London Stock Exchange's Main Market following the migration of the Group's shares from the Specialist Fund Segment on 23 February 2022. We expect our new Premium Segment listing to deliver benefits to our existing shareholders, including the increased liquidity that can arise from inclusion in stock indices.

Secondly, the Group has achieved an Investment Grade BBB+ (stable outlook) credit rating. This solid Investment Grade rating from Fitch will enable us to pursue a wider range of debt funding strategies going forward.

We continue to prioritise Environmental, Social and Governance ("ESG") matters. Last year we completed a materiality assessment, and we are using the shortlisted factors identified by our stakeholders to inform our strategy and to continue to enhance our reporting and disclosures in these key areas. During the Period, we became supporters of the Task Force on Climate-related Financial Disclosures ("TCFD") and we are also on track to become signatories of the UN Principles for Responsible Investment ("UN PRI"). We look forward to reporting further updates on these, as well as progress on our wider ESG strategy, over the coming year.

Outlook

We are now operating in a highly inflationary environment, making our secure, upward only, inflation-linked rental reviews an ever more appealing source of inflation protected income. Given the high degree of correlation between inflation and food prices and the level of investor appetite in the sector, we believe we will see continued progressive growth in both supermarket rents and capital values.

Whilst we remain mindful of the uncertain political and macro-economic outlook and the ongoing economic risks of rising inflation and higher interest rates, we nevertheless feel well positioned for the future given the strengths of our chosen sector and the resilience of our income profile.

Through our deep sector expertise and strong relationships with both our tenants and the investment market within which we operate, we have built a leading portfolio in one of the most compelling real estate asset classes in the UK investment market. We are delighted to now be a Premium Segment listed company with an Investment Grade credit rating.   

Nick Hewson

Chairman

01 March 2022 

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.

The Group uses alternative performance measures 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.

Reconciliations between EPRA measures and the IFRS financial statements can be found in Notes 10 and 23 to the financial statements.
 

EPRA PERFORMANCE INDICATORS

The table below shows additional performance measures, calculated in accordance with the Best Practices Recommendations of the European Public Real Estate Association (EPRA). We provide these measures to aid comparison with other European real estate businesses.

For a full reconciliation of all EPRA performance indicators, please see the Notes to EPRA measures within the supplementary section of the interim financial statements.

INVESTMENT ADVISER'S REPORT

Atrato Capital Limited, the Investment Adviser to the Group, is pleased to report on the operations of the Group for the Period.

Overview

Supermarkets continue to demonstrate their critical role in the UK economy as core food infrastructure. Grocery sales remain 10% higher than pre-pandemic levels despite the re-opening of the economy, in part due to a longer-term structural shift towards working from home resulting in a more permanent increase in household spend on groceries. 

Whilst in-store shopping remains the dominant channel, representing 87%5 of all grocery market sales, there has been an acceleration in the channel shift to online grocery in line with the digital transformation of the UK economy. Online grocery accounts for 13%5 of the UK grocery market and has nearly doubled in market share since the start of the pandemic.

A key pillar of the Group's investment strategy is to invest in 'future-proofed' omnichannel supermarkets that facilitate in-store shopping, while also forming part of the UK online grocery distribution network. It is omnichannel stores such as those in the Supermarket Income REIT portfolio that have primarily benefited from increased market volumes, with 80% of all UK online orders fulfilled from a store. Omnichannel stores with in-store picking for online orders are capital light, flexible, rapidly scalable and are now a profitable method of fulfilment for online grocery.

Unlike other sectors which have been disrupted by online-only players, the major supermarket operators
(68% market share) have dominated the online channel shift. Their existing store networks provide them with an invaluable last mile delivery infrastructure and create a significant barrier to entry. The Group's tenants are continuing to invest in its assets to build out their online fulfilment capacity.

The Group is highly selective in the supermarkets it acquires and seeks to ensure that its assets benefit from long unexpired lease terms with contractual, upward only, rental uplifts. In addition, we undertake a robust process of due diligence to identify acquisition opportunities and screen for sustainability credentials. The Group's stores typically have the following attributes:

·      sites which are critical to the operations of the UK's leading grocers;

·      ideally located for large catchment populations and excellent transportation links;

·      long unexpired lease terms with inflation linked rental uplifts;

·      robust underlying trading and strong tenant covenants;

·      attractive property fundamentals with opportunities for active asset management; and

·      good sustainability credentials or the opportunity for improvement through asset management

88%6 of leases within the portfolio benefit from contractual rental uplifts, either to inflation (85%) or through fixed uplifts (3%). With supermarket rents a function of store turnover, the combination of the enlarged grocery sector and the inflationary environment provide favorable tailwinds for sustainable rental growth, from which the Group is well placed to benefit over the long term.

Investment activity - Direct Portfolio

The Investment Adviser has continued to identify accretive pipeline opportunities and deploy capital, including the proceeds from the recent equity raise. During the Period, the Group added eight accretive supermarket assets for £243.4 million (excluding acquisition costs):

·      August 2021: An M&S and Aldi in West Derby, Liverpool for £10.2 million. The M&S store has 10 years unexpired lease term and five-yearly, upward-only, open market rent reviews. The Aldi store has 15 years unexpired lease term and five-yearly, upwards only, 2.5% fixed rent reviews compounded annually.

·      September 2021: An Aldi in Oldham, Manchester for £5.6 million with 10 years unexpired lease term and
five-yearly, upwards-only, 2% fixed rent reviews compounded annually.

·      September 2021: A Tesco in Prescot, Merseyside for £50.0 million with 15 years unexpired lease term and annual, upwards-only, CPI-linked rent reviews.

·      September 2021: A Morrisons in Workington, Cumbria for £28.9 million with 17 years unexpired lease term and five-yearly, upwards-only, CPI-linked rent reviews.

·      November 2021: Sainsbury's in Swansea, and Tesco in Maidstone, for £73.0 million with a weighted average unexpired lease term of 21 years, both with five-yearly, upward-only, open market rent reviews.

·      November 2021: Sainsbury's in Cannock for £75.8 million with 15 years unexpired lease term and five-yearly, upward-only, RPI-linked rent reviews.

The acquisitions have a weighted average unexpired lease term of 16 years and a weighted average net initial yield of 4.5%, supporting the Group's ability to grow its dividend whilst also enhancing the quality and diversification of the Portfolio.

Included in the acquisitions above were 10 non-food units which were acquired as part of the site freeholds. These units serve to enhance the onsite offer and have the potential for value enhancing asset management. These have been valued at £13.9 million as at 31 December 2021 and consist of a mix of non-food retail and consumer services. Post balance sheet the Group acquired a further three supermarkets with a weighted average net initial yield of 4.8% and a weighted average unexpired lease term of 19 years for a total consideration of £128.3 million (excluding acquisition costs). This included the Group's first Asda store, providing further tenant diversification to the Portfolio.

The stores acquired post balance sheet were:

·      January 2022: Sainsbury's in Washington and Asda in Cwmbran for £55.1 million with a weighted average unexpired lease term of 21 years. The Sainsbury's has seven-yearly, upward-only, RPI-linked rent reviews and the Asda has five-yearly, upwards-only, open market rent reviews.

·      January 2022: Tesco in Sheffield for £73.2 million with 17 years unexpired lease term and annual, upward-only, RPI-linked rent reviews.

Included in the acquisitions above were two non-food, quick service restaurant, units which were acquired as part of the site freeholds and serve to enhance the onsite offer. These have been acquired for a combined value of
£2.5 million (excluding acquisition costs). The total acquisitions of £371.7 million (excluding acquisition costs) from
1 July 2021 were financed from the Group's equity raises, in March 2021 and October 2021, and drawings from banking facilities (see financing below).

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
 

Investment activity - Sainsbury's Reversion Portfolio (pre and post balance sheet events)

In May 2020 the Group 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.

As such, the Group's total contribution to the JV was £108.5 million, excluding acquisition costs, and freehold interests of the properties are now owned by Sainsbury's (49%) and the JV (51%). Further details of the JV can be found in note 13 to the financial statements.

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. At acquisition, the stores in the Sainsbury's Reversion Portfolio were leased to Sainsbury's until 2023. The investment case for acquiring the stakes in the Sainsbury's Reversion Portfolio was largely based on the Group'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 (shortly after the balance sheet date), Sainsbury's exercised options to acquire 21 stores within the Portfolio. This outcome is in-line with the Group's initial underwriting of the transaction and is evidence of the strength of demand for UK grocery assets.

Sainsbury's purchase price under the option is to be 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 exercise of Sainsbury's option to purchase 21 of the 26 stores has generated a material valuation gain for the Group, as detailed in the Portfolio Valuation section below. The remaining five stores within the portfolio remain under negotiation with Sainsbury's.

Portfolio valuation

Cushman & Wakefield valued the Direct Portfolio as at 31 December 2021 in accordance with the RICS Valuation Global Standards. The properties were valued individually without any premium/discount applying to the Portfolio as a whole.

The Direct Portfolio market value was £1,413.5 million, an increase of £265.1 million for the Period following valuation growth of £21.7 million and new acquisitions of £243.4 million reflecting a net initial yield ("NIY") of 4.7% and a like for like valuation growth of 2.0%.

The valuation growth in the Direct Portfolio reflects the strength of our covenants, continuing heightened investor appetite for supermarket property assets, and our ability to source off-market acquisitions for the Group in a
market where new supply is limited. Against a backdrop of high inflation and broader industry tailwinds,
the Investment Adviser believes further growth in market rents and valuations can be achieved in
the future.

The Group's beneficial interest in the Sainsbury's Reversion Portfolio, held as an investment in a joint venture, was also independently valued by Cushman & Wakefield in accordance with the RICS Valuation Global Standards.

The net carrying value of the underlying investment has increased by a total of £37.2 million to £167.5 million during the Period. This increase is recognised within the Group's share of income from joint venture as shown within the consolidated statement of comprehensive income.

Asset Management

During the Period, the Group completed seven rent reviews, resulting in an annualised increase in rental income of £0.9 million. The average rental uplift for the rent reviews in the Period was 6.3% across seven stores of which three stores benefited from a 5-yearly rent reviews.

The Group has also completed two notable lease regears. In September 2021 the Group completed the acquisition of a Tesco in Prescot and simultaneously regeared its lease with rent reviews to open market value with a four-year remaining term on the same day. The regear secured the Group a new 15-year lease with annual CPI uplifts, rebased to 4% rent-to-turnover (from 5%), consistent with the wider portfolio, whilst creating the potential to expand home delivery at the rear of the property. The Investment Adviser identified this opportunity and initiated discussions with the vendor and the operator two-years ago in order to create an off-market acquisition opportunity.

After the balance sheet date, in February 2022, the Group completed the regear of an open market value lease with eight years remaining on our Tesco in Leicester. This is a strategically important store for the operator with a significant home delivery operation. The new 15-year lease with annual RPI uplifts, also rebased to 4% rent-to-turnover, generated an attractive total return on cost for the Group.  

Environmental, Social and Governance ('ESG') 

The Group is committed to building a resilient portfolio that plays an integral role in local communities and contributes to the natural environment and path to net zero, and it recognises the importance of tenant engagement to achieve this.

Last year the Group completed a materiality assessment using a specialist third party. The shortlisted ESG factors identified as priorities by stakeholders are being used to inform the strategy and continue enhancing reporting and disclosures in these key areas.

Unsurprisingly, given the footprint of the assets, building energy ratings were identified among the highest priorities. The Group is pleased to report that three quarters of its Direct Portfolio assets are rated EPC C or above, with energy efficiency being an important consideration in the investment decision-making process. The Group only acquires stores with an EPC rating of C or above, or where asset management opportunities have been identified to improve the rating to this level as a minimum.

The Group is aware of the UK government's Minimum Energy Efficiency Standards (MEES) requirements to ensure that all commercial properties have an EPC rating of at least a "B" by the end of 2030, with the first compliance window being April 2028. In the period to 30 June 2022, the Investment Adviser continues to work on an integrated Sustainable Investment management plan to address those properties most at risk of not complying to the various rating deadlines that have been set out in the MEES framework. We are confident that this will enable us to meet or exceed the specified targets within the required timeframe.

During the Period, the Group declared its support for the TCFD, and it is also on track to become a signatory of the UN PRI. The Group looks forward to providing further updates on these, and progress on the wider ESG strategy, in the 2022 Annual Report.

Financial results

IFRS net rental income for the Period increased by 59.8% to £32.6 million (six months to 31 December 2020:
£20.4 million). Contracted inflation-linked rent reviews in the Period resulted in average passing rent increases of 6.3% (six months to 31 December 2020: 0.9%), in addition to IFRS £2.2 million rental contribution from
new acquisitions.

Administrative and other expenses, which include management and advisory fees and other costs of running the Group, were £6.2 million (six months to 31 December 2020: £4.1 million) generating an annualised EPRA cost ratio for the Period of 15.8% (six months to 31 December 2020: 19.9%).

Financing costs for the Period were £5.7 million (six months to 31 December 2020: £3.7 million). As at 31 December 2021, the Group's weighted average finance cost was circa 2.5% (six months to 31 December 2020: 2.7%).

Operating profit, before changes in the fair value of investment properties, as reported under IFRS, increased by 61.9% to £26.4 million (six months to 31 December 2020: £16.3 million).

The net change in fair value of the Direct Portfolio investment properties in the Period was £11.0 million (six months to 31 December 2020: £15.5 million), which comprises a £21.7 million valuation gain offset by £9.3 million acquisition costs and a £1.4 million rent smoothing adjustment.

As at 31 December 2021, the EPRA NTA per share was 113 pence (30 June 2021: 108 pence), an increase of 4.6%.

The Group is a qualifying UK Real Estate Investment Trust ("REIT") which exempts the Group's property rental business from UK Corporation Tax.

Dividend

The Group declared two interim dividends for the Period, on 23 September 2021 a Q4 2021 final dividend of 1.465 pence per share and on 10 January 2022, a Q1 2022 interim dividend of 1.485 pence per share. The Q2 2022 interim dividend of 1.485 pence per share was declared after the period end and the Group remains on track to declare dividends of 5.94 pence per share for the financial year. The Group's EPRA dividend cover ratio, which shows the level of cover of EPRA earnings versus dividends paid for the Period, was 1.13x for the Period.

The earnings from the Sainsbury's Reversion Portfolio are used to repay debt secured against that portfolio and the Group does not receive a cash distribution from those earnings. As such, it has also calculated an adjusted EPRA dividend cover ("Adjusted EPRA Dividend Cover") which excludes undistributed profits of the Sainsbury's Reversion Portfolio. The Adjusted EPRA Dividend Cover for the Period was 0.87x (six months to 31 December 2020: 0.91x) reflecting the increase in the Group's investment in the Sainsbury's Reversion Portfolio in February 2021.

Financing and hedging

In October 2021, the Group successfully completed an oversubscribed £200.0 million Placing and Offer for Subscription, under which 173,913,043 New Ordinary Shares were issued at 115 pence per New Ordinary 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.

During the Period, the Group has broadened its banking relationships further. 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%.

Similarly, in August 2021 the Group also completed a one-year extension alongside a £10.0 million increase to its 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 new tranche has a term of two years plus three one-year extension options at a margin of 1.40% above SONIA.

After the balance sheet date, in January 2022, the Group arranged a £136.5 million increase to its Revolving Credit Facility with Barclays and Royal Bank of Canada. Following this increase, the total size of the facility is 
£250.2 million with a further £49.8 million uncommitted accordion option, which is exercisable at any time over the term of the facility. This secured, interest-only, Revolving Credit Facility has a remaining term of two years and two further one-year extension options, with a margin of 1.50% above SONIA.

In February 2022, the Group was assigned by Fitch Ratings Limited an Investment Grade BBB+ (stable outlook) credit rating, which will enable a wider range of debt funding strategies moving forward.
 

A summary of the Group's credit facilities is provided below:

*Including two further one-year extension options.

Total net debt as at 31 December 2021 stood at £454.0 million (30 June 2021: £390.1 million), reflecting a net
loan-to-value ("LTV") ratio of 32.1% (30 June 2021: 34.0%). The Group's medium-term debt target is an LTV ratio of 30%-40%.

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. Each property-owning entity is either directly or ultimately owned by the Group.

The Group has significant headroom on its LTV covenants. The covenants contain a maximum 60% LTV threshold and a minimum 200% interest cover ratio for each asset in the Portfolio. As at 31 December 2021, the Group could afford to suffer a fall in property values of 29.5% before being in breach of its LTV covenants and with the current hedging arrangements it has in place it has 504% of interest cover.

The Group utilises hedging derivatives to partially offset the effect of a rise in underlying interest rates. Further details of our debt and hedging can be found within notes 17 and 18 of these accounts.

Atrato Capital Limited

Investment Adviser

01 March 2022

PRINCIPAL RISKS AND UNCERTAINITIES

The principal risks of the business are set out on pages 34 to 39 of the Annual Report 2021 and include commentary on their potential impact, links to the Group's strategic priorities and the relevant mitigation factors. Since the publication of the Annual Report 2021, the Board believes that there has been no material change to the principal risks as stated and are expected to remain unchanged for the remaining six months of the financial year.

Since March 2020, the COVID-19 pandemic has been considered a principal risk to the business. We expect this risk to continue for the remainder of 2022. The grocery sector continues to be robust in the face of the wider challenges posed by the pandemic, reporting increased sales, albeit pitted against higher costs, and a rapid positive response to the changing ways in which customers shopped. This has resulted in the supermarket asset class being resilient and in high demand, underpinning asset values. The Board, the AIFM and the Adviser continue to monitor the
impact of the pandemic and where necessary implement additional controls to anticipate and mitigate any
adverse consequences.  

ALTERNATIVE INVESTMENT FUND MANAGER (the "AIFM")

The AIFM was appointed with effect from 15 June 2017 as the Company's alternative investment fund manager under the terms of a Management Agreement between the Company and the AIFM, in accordance with the Alternative Investment Fund Manager's Directive and the Alternative Investment Fund Managers Regulations 2013.

The AIFM is licensed and regulated by the Guernsey Financial Services Commission.

The AIFM is responsible for the day-to-day management of the Company's investments, subject to the investment objective and investment policy and the overall supervision of the Directors. The AIFM is also required to comply with on-going capital, reporting and transparency obligations and a range of organisational requirements and conduct of business rules. The AIFM must also, as the AIFM for the Company, adopt a range of policies and procedures addressing areas such as risk management, liquidity management, conflicts of interest, valuations, compliance, internal audit and remuneration.

DIRECTORS' RESPONSIBILITY STATEMENT

The Directors confirm that, to the best of their knowledge, this condensed set of consolidated financial statements has been prepared in accordance with IAS 34 as adopted by the United Kingdom and that the operating and financial review included herein provides a fair review of the information required by DTR 4.2.7 and DTR 4.2.8 of the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority, namely:

·    an indication of important events that have occurred during the Period and their impact on the condensed financial statements and a description of the principal risks and uncertainties for the remaining months of the Group's financial year; and

·    disclosures of any material related party transactions in the Period. These are included in note 22. 

A full list of Directors of the Company can be found at the end of this interim report.

Shareholder information is as disclosed on the Supermarket Income REIT plc website.

For and on behalf of the Board

Nick Hewson

Chairman

01 March 2022

INDEPENDENT REVIEW REPORT TO SUPERMARKET INCOME REIT PLC

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 31 December 2021 is not prepared, in all material respects, in accordance with UK adopted International Accounting Standard 34 and the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

We have been engaged by the Group to review the condensed set of financial statements in the half-yearly financial report for the six months ended 31 December 2021 which comprises Condensed Consolidated Statement of Comprehensive Income, the Condensed Consolidated Statement of Financial Position, the Condensed Consolidated Statement of Changes in Equity, the Condensed Consolidated Cash Flow Statement and the related notes.

Basis for conclusion

We conducted our review in accordance with International Standard on Review Engagements (UK) 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" ("ISRE (UK) 2410"). A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

As disclosed in note 1, the annual financial statements of the Group are prepared in accordance with UK adopted international accounting standards. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with UK adopted International Accounting Standard 34, "Interim Financial Reporting.

Conclusions relating to going concern

Based on our review procedures, which are less extensive than those performed in an audit as described in the Basis for conclusion section of this report, nothing has come to our attention to suggest that the directors have inappropriately adopted the going concern basis of accounting or that the directors have identified material uncertainties relating to going concern that are not appropriately disclosed.

This conclusion is based on the review procedures performed in accordance with ISRE (UK) 2410, however future events or conditions may cause the Group to cease to continue as a going concern.

Responsibilities of directors

The directors are responsible for preparing the half-yearly financial report in accordance with the

Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

In preparing the half-yearly financial report, the directors are responsible for assessing the Group's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so.

Auditor's responsibilities for the review of the financial information

In reviewing the half-yearly report, we are responsible for expressing to the Group a conclusion on the condensed set of financial statement in the half-yearly financial report. Our conclusion, including our Conclusions Relating to Going Concern, are based on procedures that are less extensive than audit procedures, as described in the Basis for Conclusion paragraph of this report.

Use of our report

Our report has been prepared in accordance with the terms of our engagement to assist the Group in meeting the requirements of the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority and for no other purpose. No person is entitled to rely on this report unless such a person is a person entitled to rely upon this report by virtue of and for the purpose of our terms of engagement or has been expressly authorised to do so by our prior written consent.  Save as above, we do not accept responsibility for this report to any other person or for any other purpose and we hereby expressly disclaim any and all such liability.

BDO LLP

Chartered Accountants

London, UK

01 March 2022

BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127).