Good morning, all, and thank you for joining us here today. As you know, it's been an incredibly busy time in the lead-up to today, so I'm very pleased to present to you the Supermarket Income REIT interim results to the 31st of December, 2024. It's been another period of strong operational performance for the company, supported by the highly resilient grocery sector, where our key tenants, Sainsbury's and Tesco, continue to perform strongly. We've made significant progress delivering on our key strategic objectives, which were announced in November 2024 and which are designed to drive earnings growth and enhance dividend cover, with the goal of closing the discount to NAV. Of those initiatives, the recently announced proposed internalisation will position the company well for future growth.
On behalf of the board, I'd like to express my sincere thanks to Ben Green and Steve Windsor and the wider Atrato business for the time and effort that they have invested in this company, building Supermarket to where it is today and positioning the company for the next phase of growth. On that note, I'd like to hand over to the prospective management team of the newly internalized business, starting with Mike, to take you through the numbers. Thank you.
Good morning, everybody. I'm pleased to report Supermarket Income REIT's results for the six months to 31st December 2024. Let's start with the headlines. Net rental income was GBP 58 million. We reported an improved EPRA cost ratio of 13.6% and adjusted earnings of 3 pence per share, up 3% versus the prior period. Our balance sheet remains robust, with the portfolio being valued at GBP 1.8 billion, up 0.5% on a like-for-like basis, resulting in an increase in EPRA NTA to 88 pence per share. We reported a loan-to-value of 38% when including post-balance sheet events. Starting with the income statement, net rental income grew 10% to GBP 57.8 million. Once again, our gross-to-net margin remains one of the highest in the sector at 99.4%. This reflects the strength of our core triple-net lease strategy and covenant quality of our tenant base.
Let me now take you through the principal drivers of the growth in rental income. As you can see from this chart, we have provided a bridge in portfolio passing rents over the six months. Our investment in the Sainsbury's store in Huddersfield has contributed GBP 3.9 million to the rent roll, an additional GBP 1.6 million of growth coming from 15 rent reviews, resulting in a passing rent of GBP 118.5 million at the period end. We continue to remain focused on operational efficiencies and to deliver one of the lowest EPRA cost ratios in the sector. As you can see, our underlying administrative costs have reduced slightly to GBP 7.5 million, and our EPRA cost ratio has improved to 13.6%, down 150 basis points versus the prior period. How do we compare with our peers?
You can see from this chart, at 13.6%, Super has one of the lowest cost ratios in the sector. If approved by shareholders, internalisation will deliver significant cost reductions, allowing us to target a cost ratio of sub 9%, which would place Super amongst the sector leaders. We have been active throughout the period, deploying capital into earnings-enhancing acquisitions. These acquisitions have been financed through debt, with the company operating at a higher leverage than compared to the previous period. As a result, finance costs have risen to GBP 12.9 million. Bringing this all together, we have delivered 3% growth in adjusted earnings. On the left, we start with the December 2023 position of GBP 36.3 million. You can see we achieved GBP 5.2 million of growth in rental income, which has been driven by acquisitions but also to increase this captured from rent reviews.
Administrative costs reduced slightly in the period as we continue to focus on operational efficiencies. Financing costs increased by GBP 4.2 million, with approximately 70% of this increase attributable to higher average drawn debt in the period. This brings us to GBP 37.4 million shown on the right, a 3% increase when compared to the prior period. Now turning to the balance sheet, our portfolio was valued at GBP 1.83 billion, an increase of GBP 57 million, with growth in the portfolio coming from new acquisitions. We reported an EPRA NTA of 88 pence at December 2024, up 1% over the period. Our balance sheet continues to remain robust, with the portfolio valuation representing a loan-to-value of 38%. As you can see from this chart, we have shown the movement in EPRA NTA over the period. On the left, we start with the June 2024 position of 87 pence.
Adjusted earnings are 3 pence, covering the dividends paid in the period, which are also 3 pence per share. Our portfolio valuation results in a modest like-for-like increase of 0.5%, contributing a 0.7 pence increase to EPRA NTA. This brings us to EPRA NTA of 88 pence as at December 2024. When taken together, the increase in NTA and dividends paid in the period, the group reported a 4.1% total accounting return, 85% coming from income returns. We have a strong balance sheet and have maintained our BBB+ investment-grade credit rating. As you can see from this chart, we have a staggered maturity profile across our debt facilities, with an average maturity of 3.7 years. We have two facilities maturing in FY 2026, for which we are currently exploring options to term this out with longer-dated bond issuance.
We continue to transition our debt book from secured to unsecured lending platform, with 87% of our drawn debt now unsecured, up from 60% at December 2023. 93% of our drawn debt is fixed or hedged at an average cost of 4%. Including post-balance sheet events, our loan-to-value was 38%. This provides us with the firepower and flexibility to execute our strategic initiatives. That concludes the financial review. I shall now hand you over to Rob.
Good morning. We've made significant progress on the key strategic initiatives which were announced in November last year. On cost reductions, the proposed internalisation provides a significant step towards a materially reduced cost base and an EPRA cost ratio target of below 9%. We have completed three lease renewals, demonstrating higher affordable rents for omnichannel stores, whilst we have recycled capital out of a lower-yielding asset and redeployed into higher-yielding opportunities. We continue to work towards establishing a strategic joint venture. These initiatives are all designed to drive earnings growth and enhance dividend cover. Let me take you through those in more detail. Firstly, cost reductions, with internalisation delivering significant benefits for Super and shareholders, providing material cost savings of at least GBP 4 million per annum, which is on top of the saving achieved by the previously announced change to the management fee calculation.
We have a new EPRA cost ratio target of below 9%, which would be one of the lowest in the sector. Super will also have greater balance sheet flexibility, with optionality around the issuance of longer-dated debt. We are also able to further improve alignment between the company, its management, and shareholders, with the benefit of a simplified structure, which has also allowed us to secure the team of supermarket specialists and the platform in a highly efficient and collaborative process. The internalized structure also appeals to a broader set of investors, particularly those overseas. We are also looking to progress a change of listing from investment funds to the commercial companies category.
The internalisation also provides the highest return on capital available to Super, with the 19% yield on cost being far higher than the returns which could be achieved either through share buybacks yielding 8% or in terms of unlevered IRRs on acquisitions at 9%. Now to the lease renewals, which are evidencing the higher affordable rents on the strong-performing stores that Super owns. We renewed the three shortest leases in the portfolio, extending from a remaining average term of six years back to 15 years and continuing to benefit from annual inflation-linked rent reviews. In line with our underwriting, the passing rent reduced by 20%. Importantly, this provides key evidence of the 4% rent-to-turnover affordability measure, with Super's portfolio average also at 4%. The rents have been reset at 35% above the MSCI Supermarkets ERV and 13% above the value of the ERV.
We expect the positive impact on valuations to be reflected in our full-year results. The reason that Super's omnichannel stores are able to command higher affordable rents is demonstrated here. Our key tenants have been reporting strong sales and market share growth. On the left, you can see in these numbers from Tesco's most recent results that sales growth in large-format stores is 4.2%. That is well ahead of convenience at 0.5%, and online is the fastest-growing channel at 9.3%. That growth is, of course, fulfilled through omnichannel stores.
On the right-hand side, you can see how this translates to increasingly affordable rents, with this example of an omnichannel store in Super's portfolio, which is based on actual trading data from the operator, with store turnover growing at 4.9% in the last year, which is ahead of the inflation-linked rental growth of 4%, further improving the sustainability of rents. Turning now to capital recycling, we have been able to sell above book values, supporting Super's portfolio valuation. This capital can then be redeployed to enhance earnings. Alongside the board, we continue to consider the relative merits of share buybacks and asset acquisitions, whilst we are able to maintain the robust credit strength of our tenant base by investing in high-quality assets.
We are able to selectively dispose of lower-yielding assets, with the example here of Tesco Newmarket, which was sold back to Tesco for GBP 63.5 million, reflecting a net initial yield of 5.2%. The strong pricing highlights the critical nature of omnichannel stores to the operators, achieving a 7.4% premium to book value. We are able to redeploy that capital to generate earnings accretion, with some of those proceeds being allocated to fund the cost of internalisation. We have also been looking to enhance earnings through accretive acquisitions. The first example is Sainsbury's in Huddersfield. A strong-performing, large-format omnichannel store acquires at an attractive net initial yield of 7.6%. We also completed a second tranche sale and leaseback with the investment-grade covenant of Carrefour, with nine omnichannel stores acquired at a 6.8% net initial yield. The final pillar of our key initiatives is exploring a strategic joint venture.
This shares the same benefits as outright disposals in providing evidence above book values and also financial flexibility with capacity to redeploy. There are also further advantages with JVs, such as demonstrating the ability of Super to scale through third-party capital in absence of raising in equity markets, whilst having a third-party support our investment thesis around higher-yielding assets. It also supports earnings through management fee income, which Super would now be able to capture in full post-internalisation, whilst retaining an ownership interest in the assets provides long-term optionality. We hope to be able to demonstrate some progress on joint ventures in the near future. Now to the investment market, with the chart here of MSCI investment yields showing that supermarket yields have reached the peak last seen during the global financial crisis.
Whilst the path to lower interest rates will clearly be much slower, we are confident that investment market activity has shown that the direction of travel for supermarket yields will be downwards. You will note that the quality of Super's portfolio is reflected in its yield at 6% today, compared with MSCI at 6.3%. The higher net initial yields on supermarkets relative to other property sectors provides an attractive return, which has a greater weighting to income. These supermarket yields are supported by transaction evidence. To take you through a few examples which are considered for Super, starting at the lower-yielding end, Sainsbury's in Wantage was acquired by a local government pension scheme at a 4.6% net initial yield, with the lease being reset with Sainsbury's to a 25-year term.
We saw ICG acquire an omnichannel Sainsbury's in Halifax with a 14-year remaining lease term, which is over-rented and therefore trades at a 6.1% net initial yield. Tesco continues to be active, with a further store acquired in Congleton at a 7% net initial yield, with a seven-year remaining term. These transactions provide evidence of the buyers across the spectrum of opportunities in the investment market. Ongoing competition for assets is expected to provide upwards pressure on valuations. Why do we see this competition for assets continuing? Looking at Super's investment case, you can see why. We operate in what is inherently a defensive sector, which is resilient throughout economic cycles. The income it produces is highly secure. For example, 79% of Super's income is from investment-grade tenants.
The long leases also provide excellent visibility of income, with Super's average lease term at 12 years, of which 81% has contractual inflation-linked rent reviews. The assets are also future-proofed, acting as last-mile omnichannel fulfillment hubs. We see upside potential with growing store revenues providing sustainable rental growth. In summary, we are well-positioned for future growth. The resilient grocery sector remains highly attractive. We are focused on enhancing earnings and closing the discount to NAV. In the near term, we are targeting further progress on strategic initiatives, for which there are three key areas of focus. Firstly, we aim to deliver internalisation by the end of this month and then commence the process to pursue a change of listing. We continue to make progress towards a strategic joint venture, and in recycling capital, we'll be reviewing all options, including share buybacks, debt repayment, and store acquisitions.
Finally, we are targeting the refinance of debt facilities as we further transition to unsecured and look to extend the maturity profile. Thank you. We'll now hand over to questions.
Thanks for the presentation. This is Sam Knott from Kolytics. Just on those lease regears that are 13% above ERV, do you have a number for your whole portfolio where you are relative to valuers' ERVs at passing rent and sort of how fair do you think valuer s' ERVs are given that?
Good question. Sorry, I'm just setting up because we're going to have some Q&A coming in. I think the point for us is, as you say, values are quite conservative. This transaction proves that values are quite conservative with 13% above where they expected those rents to reset to.
I think broadly, we see the portfolio is right rented, 4% rent-to-turnover average, GBP 24 per sq ft. That reads across to about 13%-15% above the valuers' ERVs again. Actually, as I say, we see the portfolio is right rented. Hopefully, this transaction proves that our underwriting at the 4% rent-to-turnover is the right number. One of our jobs for this year, one of my priorities, is engaging with the valuers across the market. The MSCI Index is based on valuer submissions. It is valuers who are suggesting there is no growth. Our regears are showing there is growth. One of our jobs is to educate valuers. Some of those valuers are not grocery sector specialists. They will value across multiple sectors.
Therefore, it's our job to educate them on the affordability point and how actually you can't just take a single rent per sq ft metric when store sizes vary dramatically, when trading performance varies dramatically. It's all about the affordability relative to the trading performance. Because we own some of the best stores, our stores will achieve higher rents.
Got it. That's very helpful. Thanks.
Thanks.
John Cahill from Stifel. A couple of questions, please. First, on the joint venture, is that something that you envisage you would seed with assets from your existing portfolio, or would it be something where you'll bring in from outside as purely an expansionary vehicle? The second question on the underlying investment market, are you now competing with the operators in terms of when you look for acquisitions? Obviously, we had a long period of overseas capital, realty, etc. We're buying assets, the kind that you like. Is it now sort of you versus Tesco and Sainsbury's?
Right. Just, I guess, taking the JV point first, then. Yes, the idea would be to seed it with assets we already own. The benefit of that is they're assets we know well, we like. We still like the returns, but it allows us to release some capital and recycle that. We're then able to still retain some long-term optionality over those assets as well. They are not assets. There is a scarcity point in our market to an extent. Where we have some of the better stores in the market, we wouldn't want to sell them outright necessarily.
If you can do it at a slightly larger scale, but sell an interest in them and retain that long-term optionality, that's quite attractive. It also takes out the point of if you're trying to JV on assets that are in the market, you've also got the execution risk on those pipeline assets. For us, it's kind of focus on the pipeline as we normally would, but releasing capital on assets we already own because you can take your time. Obviously, structuring a JV is quite complex. Just on the point on competition versus the operators, I think it's fair to say we've always been competing with the operators, particularly Tesco. I think they've deployed a good couple of billion over the years since Super was launched into buying back stores. The point there is that is not to say that they buy everything.
They don't buy every strong, they don't even buy every strong store. They have to go to committee. There are various competing demands on their capital. Whether that's share buybacks, debt repayment, CapEx, Tesco's CapEx bill is well over GBP 1 billion a year into the store estate. The way they describe it to us is we don't have a blank checkbook. They will have to submit a paper to the board, and it's not a guarantee that they will buy back. Timing is one of the important points for them. Approaching the end of the financial year just after Christmas, we've seen them buy back a couple of stores, including one of our own, because they've had a good trading performance through Christmas, and they know exactly what excess cash is in the business. Yeah, there are some stores that we have expected them to try and buy back in the past, and they haven't because the capital has not been there.
Great. Thank you.
Jonathan. Hi, Jonathan Cowling here from Goldman Sachs. Just to go back to your JV, how should we think about sizing? Is that obviously to replace equity from the equity markets? Is that the kind of size that we need to think about versus your previous raises? Is that an exercise where you want to retain control or you're really open in terms of structuring that you want to have?
Yeah. Sorry, Jonathan, what was the second part of the question?
Do you want to retain control on the JVs, or is that like 50/50, or?
I guess the point with a joint venture is it has to be at meaningful enough scale to be worthwhile. I think for us, yeah, I'm slightly limited in what I can say, I guess, in terms of sizing, but it will be sufficiently worthwhile is probably how I'd describe it. The structure would look something like a 50/50. I think that's kind of a fair approach in terms of where private capital partners would approach this from. They want to have a meaningful say as well. You wouldn't sell a minority interest. Equally, we want to retain a sufficient interest to make it for us to retain that long-term optionality over the assets. Yeah, I think we can say that I would expect anything we do to be a 50/50 and seeded with assets we already own.
In terms of sizing, it will be meaningful enough to be worthwhile. As I mentioned earlier, raising in equity markets is not something that's open to us at the moment. Scaling through this kind of opportunity is quite attractive. You generate the management fee income, which enhances earnings, and then you have that capital to redeploy, which, again, you can enhance earnings with. This is all about our ability to scale and demonstrating that we can grow earnings. Everything we're looking to do is demonstrate to the market that not only we can cover the dividend, we can sustainably grow it. Hopefully all these factors come together, and it should help to give us some positive momentum and help to close the discount to now.
How broad is the demand universe for this kind of JV? Are we talking U.K. institutions? Are we talking international partners? Are we talking PE? What kind of buyers or partners do you see out there?
I think all of the above in terms of what you've just listed. What's actually more important for us is it needs to be the partner that works for Super as well. It needs to be someone with the same thesis, the same investment horizon that is sufficiently long-term to be worthwhile. You've seen us do it quite successfully in the past with British Airways Pension Scheme. That worked very well. I would expect it to be a very credible third-party private capital with an impressive track record in real estate that gives us that.
Again, it's the softer benefit of having a credible third party supporting our investment thesis around stores, particularly in the case of high-yielding assets. Yeah, I think it's clearly we're speaking to it. It's something we've been actively working on. We announced back in our November initiatives that a joint venture was something that was on our horizon. Yeah, I think as and when we can give you more, we will come back.
Thank you.
Any online? I think we had a couple online. Sorry. Do you want me to do it? I think there's probably one for Mike, but it was, would the proposed change in listing affect your REIT status?
Yeah. The change in listing to the commercial company category, we do not anticipate to impact our REIT status. Thank you. Brilliant.
Thank you all for coming in. Any more questions? No.
I think that's everything. Yeah. Thank you all very much indeed.