Wells Fargo jumps at supermarket REIT financing

Financings like the £60m, five-year revolving credit facility for Supermarket Income REIT should become more regular in the UK grocery retail sector as demand mounts.

US bank Wells Fargo has sought to take advantage of the limited supply and defensive nature UK supermarkets by providing £60 million (€66.3 million) of debt financing to Supermarket Income REIT.

The secured, five-year revolving credit facility was closed on 24 July. It marked a rare loan to be agreed against the supermarket asset class in today’s market.

“There is a limited supply of supermarkets,” Max Sinclair, head of UK commercial real estate at Wells Fargo, told Real Estate Capital. “We don’t see any of these supermarket owners selling these assets significantly every day.”

As one of the few types of retailers to remain open during lockdowns, European sales of grocery stores outstripped the rest of the retail sector combined in Q2, according to Real Capital Analytics.

“This feels like a very defensive lending decision, made to a well-managed and very focused owner of supermarket assets,” said Sinclair. “What we’ve been asked to do for Supermarket Income REIT fits in well with our portfolio of loan assets. They focus on long leases and, where they can, leases that have inflation-protected rent reviews.”

Although these types of transactions are thin on the ground currently, further financing against supermarket assets should be on the horizon.

UK supermarket real estate investment manager Atrato Capital acted as investment advisor to Supermarket Income REIT. Robert Abraham, director at Atrato, said one of the reasons for borrowing from Wells Fargo was its willingness to be flexible. The facility includes two one-year extension options, as well as a £100 million uncommitted accordion option. “The extension and accordion options mean we can grow the facility and extend it over time to suit our needs, allowing for up to £160 million total borrowing so it matches our ambitions in the space,” Abraham said.

“We have fortunately found ourselves in the right sector for this particular crisis,” Stephen Windsor, partner at Atrato, told Real Estate Capital. “The supermarket property sector is pretty hot right now and there is a lot of capital chasing it. A lot of banks are willing to lend into the sector, so expect more deals from both us and others in this space.”

Atrato managed to capitalise on the equity side of the pent up demand for the sector too to raise £140 million for the REIT via a placing agent in April, one month after covid-19-induced lockdowns began. The raising far exceeded its original £75 million target. The firm has also managed to collect 100 percent of rents through the pandemic.

A touch wider

“From a banking perspective, the supermarket sector falls into one of the lowest risk categories of property companies to lend into,” said Windsor. “The sector therefore qualifies for some of the lowest spreads in bank lending.”

The revolving credit facility, which Atrato has already drawn down against a number of its assets, has a margin of 2 percent above three-month LIBOR. Windsor said the margin was a touch wider than Atrato’s previous financing, due to the banks’ own cost of funding increasing in the crisis. “Nonetheless, it was more than offset by lower interest rates,” he added.

Sinclair similarly stressed the importance of looking at the all-in cost of debt. “At around 210 basis points, this transaction actually compares quite nicely to the sort of pricing it would have paid if it had been lower margin four or five months ago.”

For investors in supermarkets generally, he added that a 7 percent-plus return in an environment when interest rates are close to zero should be considered an attractive proposition.

“If they are able to purchase assets at a 5 percent yield, a 7 percent-plus yield is achievable if leverage is factored into the equation,” he said.

Although these types of transactions are thin on the ground currently, further financing against supermarket assets could be on the horizon.

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