Supermarket Income REIT raises ‘milestone’ credit facility

New credit facility, combined with recently raised equity, gives the grocery property investor £500m for an acquisition spree.

Real estate investment trust Supermarket Income REIT has sourced a £412.1 million (€483 million) unsecured credit facility as it prepares to expand its share of the UK grocery property sector.

The new facility – which has a margin of 1.5 percent over SONIA and a weighted average term of six years – is being provided by a syndicate of banks comprising Barclays, Royal Bank of Canada, Wells Fargo and Royal Bank of Scotland International. The syndicate beat an international line-up of lenders seeking to finance the grocery property investor.

Robert Abraham, managing director for fund management at Atrato Capital, the investment adviser to Supermarket Income REIT, said: “The interest we had is testament to how simple our business model is to understand. We are in a defensive sector that is based on non-discretionary spending, and it is also one that proved stable during covid. As a result, there is a huge amount of inbound interest from equity and debt investors.”

He added that sourcing the unsecured loan was a “milestone” for the business.

Supermarket Income REIT and Realty Income REIT have been the most sustained buyers of supermarket real estate in the UK, together accounting for 62 percent of the £1.85 billion of transactions in 2021, during which time supermarket yields hit 4.25 percent, reducing from 4.35 percent in 2020, according to Colliers.

“Moving to unsecured financing is a huge step for our business,” said Haffiz Kala, Atrato Capital’s finance director. “This facility gives us increased flexibility and we can continue to deliver our expansion at especially attractive debt terms. Lenders specifically like our investment thesis, combined with our scale and conservative debt strategy, which has historically been on average between 30 to 40 percent loan-to-value.”

Almost all – 90 percent – of the group’s portfolio has an RPI, fixed annual, or five-yearly upward-only rent review. The remaining 10 percent has five-yearly open market rent reviews. The portfolio’s rental collection was 100 percent during the pandemic – according to ratings agency Fitch. The company’s strategy is to acquire assets with long unexpired lease terms, targeting a portfolio average unexpired lease term of more than 15 years, and its tenants include Tesco, ASDA, Sainsbury’s and WM Morrison Supermarkets.

Supermarket Income REIT will combine a portion of the fresh debt with the £300 million of equity that the group raised in May, in what was an oversubscribed equity share offering, giving it a total acquisition spend of £500 million. The remainder will be used for refinancing of existing facilities.

In recent weeks, data analytics group Kantar reported that the average annual grocery bill is on course to rise by £380 – £100 more than it had predicted a few weeks earlier, showing sharp price increases in the sector.

Abraham said the business was confident that despite the pressures on stores not to pass on price increases, the rental growth outlook is positive. “Rental uplifts are contractual. If a tenant was to breach terms, then it would risk losing access to its property – which is a vital element of their business as they need proximity to consumers. This is why there are a handful of dominant supermarkets in the UK as well-established store networks are crucial.”