INVESTMENT ADVISER'S REPORT

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

Since 30 June 2024, the Company has made significant progress delivering on several of its key strategic objectives set out in the announcement of 18 November 2024: capital recycling through the sale of a large omnichannel supermarket above book value, the earnings enhancing acquisition of a portfolio of Carrefour supermarkets, and renewing and extending leases with starting rents significantly higher than market and valuer expectations. The Company has also proposed to internalise its management function to further reduce costs and better align itself with shareholders. The Company continues to work hard to deliver against its remaining strategic initiatives. Delivery on these key objectives combined with our exposure to investment grade tenants in the non-discretionary grocery sector means that the Company is well positioned for the future.

Overview

SUPR's key tenants continue to gain market share

In the six months to December 31 2024, Tesco and Sainsbury's combined YoY sales grew 4.9%¹² which is above UK grocery sales growth of 2.5%¹³ and 2024 UK GDP growth of 0.9%¹⁴. The relative outperformance has been apparent in the period because supermarkets tend to perform well during economic downturns due to the essential nature of grocery and household items, which remain a priority regardless of economic conditions. Unlike discretionary spending, consumers cannot cut back significantly on everyday necessities, ensuring steady demand for supermarkets.

SUPR's key tenants, Tesco and Sainsbury's, gained significant market share, driven by strategic investments in pricing, product offerings and customer experience. Both retailers focused on enhancing their value propositions to meet the growing demand for affordable options amidst economic pressures. Tesco, with its loyalty program, and Sainsbury's, through its focus on quality and sustainability, successfully attracted budget conscious shoppers while maintaining premium offerings. Their ability to balance convenience, variety, and competitive pricing helped solidify their positions at the forefront of the UK grocery market.

Focus on best-in-class operators in recession proof grocery sector continues to deliver

SUPR has highly secure income and has achieved 100% rent collection since IPO. The portfolio has an 79% weighting towards the investment grade covenants of Tesco, Sainsbury's and Carrefour (79% as at 10 March 2025). These operators can maintain their dominance in the grocery market due to their scale and the strategic strength of their store estate, ensuring extensive customer reach, operational efficiency, and strong supplier relationships.

Grocery spending remains essential regardless of economic conditions, ensuring stable footfall and resilient trading performance. This underpins secure, long-term rental income, making supermarkets a defensive and attractive asset class.

Operators continue to invest in their online platforms

A key pillar of the Group's investment strategy is to invest in 'future-proofed' omnichannel supermarkets. UK operators continue to invest in enhancing their online platforms to cater to growing consumer demand for convenience and digital shopping. Our tenants have expanded their e-commerce capabilities by improving website functionality, increasing delivery slots, and offering more personalised shopping experiences. They focus on utilising their existing store estate to ensure quicker and more reliable delivery services. This push into online sales not only helped supermarkets retain customers seeking flexibility but also allowed them to tap into the growing trend of hybrid shopping, where customers combine online and in-store channels.   

Proposed internalisation of the Company

In March 2025, the Company announced that following a collaborative process between the Investment Adviser and the Board, the Board has decided to internalise the Company's management function.

The Board has agreed that on completion of the proposed internalisation it will pay a £19.7 million termination fee to the Investment Adviser, with an additional £0.3 million for the termination of its AIFM agreement and, to ensure continuity of operations, Atrato will receive £0.8 million for the provision of transitionary services for up to nine months post completion.

As part of the internalisation process Rob Abraham, Fund Manager, Supermarkets, at Atrato Group and Mike Perkins, Finance Director, Supermarkets, at Atrato Group will join the Board as Chief Executive Officer and Chief Financial Officer respectively and a further 12 members of Atrato staff will transfer as employees of the Company. 

The Board believes that the proposed internalisation provides a number of compelling financial and strategic benefits including; providing significant cost savings, conservatively estimated at £4 million annually; greater alignment with shareholders; a simplified management structure, securing the specialised and experienced fund team for the longer term; and the opportunity to appeal to a wider group of investors which would not otherwise invest in externally managed vehicles. 

Furthermore, if the proposed Internalisation becomes effective, the Company will explore a transfer of its listing from the "closed-ended investment funds" category to the "equity shares (commercial companies)" category. The Board expects that such a transfer of listing may remove administrative burden, provide greater operational flexibility, and potentially attract a wider range of research analysts and potential investors.

The Board has decided that the proposed internalisation should be put to a voluntary vote, and therefore a Circular was sent to shareholders on 4 March 2025 convening a General Meeting scheduled for 20 March 2025. Subject to shareholder approval, the internalisation is expected to take effect on or around 25 March 2025.   

Growing earnings through capital recycling and opportunistic acquisitions

Post-period end, SUPR disposed of Tesco, Newmarket for a consideration of £63.5 million, a 7.4% premium to book value. The store was acquired by Tesco Plc, underlining the strategic importance of large format, omnichannel stores with strong trading performance to the supermarket operators.

By recycling lower-return assets into high-yielding opportunities SUPR can grow earnings and improve income generation and capital efficiency. In November, SUPR acquired Sainsbury's, Huddersfield (7.6% NIY) and completed a second sale and leaseback portfolio acquisition with Carrefour in France (6.8% NIY). Both acquisitions were completed at highly attractive margins above the cost of debt. 

By targeting top performing, omnichannel supermarkets, leased to strong tenants, SUPR operates with strong conviction that the leases on its stores will be renewed. Robust trading performance and the strategic importance to the operators make these stores highly valuable assets for the tenants, reinforcing their commitment to long-term occupation, as evidenced by Tesco repurchasing its store in Newmarket.

Lease renewals evidence affordable rental levels for UK operators

SUPR has agreed three new leases on its shortest unexpired leases with Tesco. These leases on stores in Bracknell, Bristol and Thetford have been extended to 15 years at rents 35% above the MSCI supermarket benchmark index and 13% above the valuer's ERV, and will benefit from annual RPI -linked rent reviews (subject to a 4% cap and a 0% floor). The new leases will extend the portfolio WAULT from 11 years to 12 years, with the next material lease renewal in seven years' time.

The lease renewals support SUPR's thesis that 4% rent to turnover is a sustainable rental level for UK grocers. It also proves that top performing, large format omnichannel stores are likely to regear materially above the MSCI supermarket benchmark index and valuer ERVs. Lease regears at these levels unlock potential higher reversionary values and capital growth across the SUPR portfolio.

Valuations remaining stable with modest growth

The UK investment property market has shown signs of recovery with the benefit of declining inflation and falling interest rates which historically have had a positive impact on property values. The supermarket sector has experienced a high level of investor demand which has been curtailed by a limited supply of strong trading, omnichannel supermarkets, reaffirming the importance of the Company's existing portfolio.

Cushman & Wakefield valued the Portfolio as at 31 December 2024 in accordance with RICS Valuation Global Standards. The properties were valued individually without any premium/discount applied to the Portfolio as a whole.

The Portfolio value was £1,833 million, with the valuation reflecting a net initial yield of 6.0% and like-for-like valuation growth of 0.5% for the period. The increase in valuations translated to a 0.7 pence improvement in NTA.

The growth in valuations reflects the benefit of contractual inflation-linked rental uplifts along with improved market sentiment towards supermarket real estate. The average rental increase from rent reviews in the period was 3.0% on an annualised basis. 83% of the Company's leases benefit from contractual rental uplifts, with 81% linked to inflation and 2% fixed uplifts¹⁵. We expect to see the full benefit of the Tesco regears in the June 2025 valuation.

Completion of JSE listing

Following positive feedback from South African institutional investors, the Company decided to pursue a secondary listing on the JSE to enhance its profile with a broader investor base, improve trading liquidity and diversify its shareholder register. The Company successfully completed a secondary listing on the JSE in December 2024 and is engaging with South African institutional investors who have expressed an interest in purchasing the Company's shares. From 24 March 2025 the Company will be included in a number of South African indices, most notably the FTSE/JSE All Share Index ("ALSI") and FTSE/JSE All Property Index ("ALPI"), which is expected to increase liquidity in the stock.

Delivering on our sustainability strategy

The Company's sustainability strategy is underpinned by three core pillars that reflect the most material sustainability issues for the Company and the long-term nature of its investments:

Pillar 1: Climate and Environment - Reduce emissions to achieve a net zero carbon portfolio and mitigate the environmental impacts of our assets.

Pillar 2: Tenant and Community Engagement - Partner with tenants and stakeholders to ensure  assets enhance the communities in which they are located

Pillar 3: Responsible Business - Strengthen ESG performance and uphold responsible business practices to deliver long-term value.

The Company continues to deliver on this strategy and underlying targets, as outlined in its most recent Sustainability Report.  The Company's efforts to improve its ESG performance have been recognised externally with EPRA Sustainability Best Practices Recommendations (sBPR) Silver and Most Improved Awards achieved in September 2024.

Understanding the sustainability performance of tenants, particularly with respect to energy consumption, continues to be a key focus of the Company. This is reflected in the Company's efforts to proactively engage and collaborate with tenants and property managers on asset-level ESG enhancement activities (including in relation to nature and biodiversity) and the Company's underlying sustainability target to improve the amount of actual ESG data collected from tenants year-on-year.

The Annual Report and Accounts for the year ended 30 June 2024 included the Company's Task Force on Climate-Related Financial Disclosures ("TCFD") report, with disclosures made across all 11 TCFD recommendations. Included within this report was the Company's GHG Inventory disclosures, across Scope 1, 2 and 3 emissions which for the first time were independently assured. The Company is currently working with external sustainability advisers, Anthesis, to prepare its first high-level Transition Plan which links to the Company's science-based Net Zero and near-term emission reduction targets.

The Company's approach to sustainability is underpinned by the Board's commitment to good stewardship and creating long-term value for our stakeholders. The Company continues to support the responsible investment activities of its Investment Adviser including as a signatory to the United Nations Principles for Responsible Investment ("UN PRI") and participant in the UN Global Compact ("UN GC").

The Company is currently out of scope of the UK Sustainability Disclosure Requirements ("SDR") investment labelling regime as the regime does not apply to non-UK AIFs. However, the Company's communications and marketing materials are reviewed against the SDR's anti-greenwashing rules, to ensure that any sustainability claims are fair, clear, and not misleading.

The Company's next annual Sustainability Report will be published alongside the Company's Full Year Results, providing an overview of progress against the Company's Sustainability Strategy.

Financial results

Net rental income

In the period, the portfolio generated net rental income of £57.8 million (six months to 31 December 2023: £52.6 million), representing an increase of £5.2 million or 10.0% compared to the prior period.

On a like-for-like basis, EPRA net rental income increased by 2.1%. During the period, we successfully completed 15 rent reviews generating £1.6 million of additional rental income, representing an increase of 4.2% (or 3.0% on an annualised basis).

The second half of the year will benefit both from a full period of rental income from the recent Huddersfield acquisition, and further still from the Carrefour portfolio acquired post period end. In addition, contractual uplifts across 29% of the portfolio subject to a review in the six months to 30 June 2025.

Direct property expenditure decreased marginally to £0.3 million (six months to 31 December 2023: £0.4 million), and our gross to net margin continues to be among the highest in the sector at 99.4% (six months to 31 December 2023: 99.3%), reflecting the strength of our core single-let strategy and further highlighting the covenant quality of our tenant base.

Rent collection rates were 100%¹⁶ for the six months to 31 December 2024 (six months to 31 December 2023: 100%), as our focus on top trading stores and covenant quality provided exceptional income security.

Administrative and other expenses and EPRA cost ratio

Administrative and other expenses, which include all operational costs of running the business, remained flat period-on-period at £7.6 million (six months to 31 December 2023: £7.6 million). We continue to monitor the operational efficiency of the Group through its EPRA cost ratio, which is among the lowest in the sector, and improved by 150bps to 13.6%.

Net finance costs

Net finance costs increased by £4.0 million primarily due to an increase in leverage compared to the prior period as we continued to deploy capital into earnings enhancing acquisitions.

Adjusted earnings

The Directors consider adjusted earnings a key measure of the Company's underlying operating results and therefore excludes items which are non-recurring in nature; in the prior period this included finance income on derivatives held at fair value through profit on loss, however this is now included within the EPRA earnings following the update to the EPRA BPR guidelines in September 2024. EPRA earnings for the six months to 31 December 2024, also includes an adjustment for costs related to the Company's secondary listing on the Johannesburg Stock Exchange during the period. This means that EPRA and adjusted earnings are the same for the period being £37.4 million (six months to 31 December 2023: £36.3 million). On a per share basis, EPRA and adjusted earnings increased in the period to 3.0 pence (six months to 31 December 2024: 2.9 pence) per share.

A full reconciliation between IFRS and Adjusted earnings can be found in Note 11 of the interim financial statements.

Dividend

In August 2024, the Company paid a fourth interim dividend in respect of the period from 1 April 2024 to 30 June 2024 of 1.515 pence per share, taking total dividends paid and declared in respect of the financial year ended 30 June 2024 to 6.06 pence per share.

In November 2024, the Company paid a first interim dividend in respect of the period from 1 July 2024 to 30 September 2024 of 1.53 pence per share and in January 2025 approved a second interim dividend of 1.53 pence per share for the period from 1 October 2024 to 31 December 2024.

The Company is continuing to target a dividend of 6.12 pence per share in respect of the year ending 30 June 2025.

EPRA net tangible assets and IFRS net asset

EPRA net tangible assets ("EPRA NTA") is considered to be the most relevant measure for the Group, and includes both income and capital returns, but excludes fair value of interest rate derivatives and revaluation to fair value of investment properties held at amortised cost.

At 31 December 2024, EPRA NTA was £1,091 million (30 June 2024: £1,085 million), representing an EPRA NTA per share of 88 pence, an increase of 1% since 30 June 2024 and together with dividends paid, resulted in a Total Accounting Return ("TAR") of 4.1%.

Portfolio Valuation

The value of the portfolio at 31 December 2024, including the fair value of investment properties held at amortised cost and assets held for sale was £1,833 million (30 June 2024: £1,776 million). During the period, the Group invested £49.7 million in one omnichannel supermarket (excluding transaction costs). On a like-for-like basis, the portfolio recognised a revaluation gain of £8.4 million, or 0.5%.

Cash Flow and Net Debt

Cash flows from operating activities before changes in working capital increased by £5.3 million to £49.0 million, primarily due to increased rental income received from rent reviews and property acquisitions.

Net debt increased by £48.5 million over the six-months to 31 December 2024, to £704.0 million, and represents a loan to value of 39% (30 June 2024: 37%). The Group continues to maintain a conservative leverage policy, with a medium-term target LTV of 30-40%.

Financing

During the period, the Group announced the completion of a £170 million refinancing through its first private placement issuance and a new unsecured bank facility. As part of the refinancing, the Group completed an agreement with a group of institutional investors for a private placement of €83 million new senior unsecured notes, which have a maturity of seven years and a fixed rate coupon of 4.44%. In addition, the Group also refinanced its existing £97 million secured debt facility with Deka through a new £100 million unsecured debt facility with ING Bank N.V., London Branch. The facility comprises a £75 million term loan and a £25 million revolving credit facility, which has a margin of 1.55% over SONIA and maturity of three years and has two one-year extension options. This is capped with an interest rate hedge at an all-in rate of 2.95% until January 2026.

Post period end, the Group completed a €39 million private placement issuance with a maturity of seven years and a fixed rate coupon of 4.10%. The Group also used the proceeds of the Newmarket sale to pay down £31.5 million of debt from existing facilities.

Following the refinancing, as at the date of this report the Group has a weighted average debt maturity of 3.7 years, a weighted average debt cost of 4.0% and net LTV of 38%.

The Group's interest rate risk is mitigated through a combination of fixed debt and derivative interest rate swaps and caps. As at 31 December 2024, 93% of the Group's debt was hedged which provides stability of interest costs in the current uncertain macro-economic environment.

The Group continues to monitor its banking covenants and maintains significant headroom on its LTV and ICR covenants. As at 31 December 2024, at a Group level property values would need to fall by around 36% before breaching the gearing covenant. Similarly, operating income would need to fall by 57% before breaching the interest cover covenant.

Fitch Ratings, as part of its annual review, reaffirmed the Group's BBB+ rating with a stable outlook.

Atrato Capital Limited

Investment Adviser

10 March 2025