Buying Tesco, J Sainsbury and Waitrose stores in places ranging from Cumbernauld to Eastbourne might not be the most exciting activity, but it is the meat and grist of life for one young stock market vehicle.
Supermarket Income, a real estate investment trust, has a portfolio of just under 50 outlets in the UK, 23 of which it owns directly. The brisk pace of its acquisitions in recent months, backed by regular fundraisings including a £200 million share placing late last year, suggests that it won’t be long before its list of properties hits the £1 billion valuation mark.
Its position at the centre of a grocery market that has flourished during the pandemic might also help to explain why its shares trade at a premium to the net value of the underlying assets.
Founded and listed on the special funds segment of the London stock market in 2017, Supermarket Income Real Estate Investment Trust specialises in buying large superstores in Britain, which it calls omnichannel retailers. These operate home delivery and click-and-collect services on top of being traditional shopping outlets.
Its properties are freehold or on extremely long leases and are occupied by Aldi and Wm Morrison, as well as Tesco, Sainsbury’s and Waitrose. The average length of its tenancy agreements with retailers is 16 years, with attractive initial rental yields of above 5 per cent.
The allure for prospective shareholders is that, supported by upward-only rent reviews, the trust should be able to generate a reliable income stream that underpins a solid dividend. The model also offers the prospect of capital appreciation driven by higher valuations.
Furthermore, being a real estate investment trust means that, in exchange for light tax treatment, it pays 90 per cent of rental income as dividends. It has diversified over the past year, too, buying a 25.5 per cent stake in a 26-shop portfolio of freehold supermarkets through a joint venture with the British Airways Pension Trustees.
So on the face of it, there’s quite a lot to like. There is every suggestion that the resilience of trading at the big grocers will continue — and buying shops that deliver and offer click-and-collect means that it is keeping pace with consumers’ move online. With commercial property, there is always the worry about sliding valuations, but that hasn’t happened so far — indeed, the value of directly owned properties rose by 4.3 per cent over the year to the end of June. Collecting payments from grocers is hardly an issue and, unsurprisingly, Supermarket Income has received 100 per cent of its contracted rents throughout the Covid-19 outbreak.
One niggle may be that its regular acquisitions mean that the trust often turns to shareholders for fresh funds, the proceeds of which it uses to fund property deals and to keep the lid on borrowing requirements. Supermarket Income has a target of keeping its loan-to-value ratio — borrowings as a percentage of property values — at between 30 per cent and 40 per cent over the medium term. This reassuringly low leverage is achieved in part by issuing equity: for example, October’s £200 million cash-call came after a placing to raise £139.8 million in April. For investors comfortable with regularly putting their hands in their pockets, though, this company looks to be a pretty good bet.
The shares, up ¼p, or 0.25 per cent, at 106¾p yesterday, carry a dividend yield of 5.5 per cent and trade at a modest premium of about 5.7 per cent to the net value of its assets. In all, a worthy addition.
Advice Buy Why Disciplined property investor with high-calibre supermarket tenants and a generous dividend yield that looks solid
Paypoint
Paypoint seemed to be making hard work of prioritising its main British market, but a flurry of activity in the final months of the year put it back on a better track.
Within weeks in October and November, the payments processor offloaded its Romanian business and bulked up its domestic division with two acquisitions in a fast-growing part of the sector. It followed this with a resilient set of interim results, given the disruptions of lockdown. Yet still the shares are trading well below their highs of a year ago.
Paypoint was established in 1996 and people first used its machines to load “keys” with pre-paid electricity and gas for their meters. Its terminals are now also used to pay rent and council tax, among other bills, and can be used to top-up mobile phones. As well as cash machines, it operates a send-or-collect parcels operation.
Parts of the business, most notably bill-paying and cash machines, are in long-term decline as the nation goes increasingly digital. Others, such as parcels, offer plenty of opportunity for growth. In addition, the group has something of a secret weapon in Paypoint One, a do-it-all terminal for retailers that checks and manages stock and acts as a till. At the end of September, it was in use in 16,900 shops.
Paypoint’s acquisitions, of the Handepay card payments business and the Merchant Rentals terminal leasing company, were chasing growth and were aimed at the two million or so small operators that take cash only. The deals, at a cost of £70 million, look intelligent.
There is a lingering uncertainty in that Ofgem, the energy regulator, has objected to the terms of exclusivity arrangements that Paypoint has with some energy suppliers over pre-payment customers. However, while it might be a financial setback if the group has to rethink its contracts with energy suppliers, it doesn’t derail the investment case.
The shares, down 8p, or 1.2 per cent at 646p, trade for 13 times Liberum’s forecast earnings for a dividend yield of 5.4 per cent. A recommended “buy” by this column in September 2019, when they stood at 922p, they are worth holding for value to return.
Advice Hold Why Plenty of chances for growth despite Ofgem worry
