Good morning, everyone, and welcome to SUPR's interim results presentation for the six months to the 31st of December, 2023. I'm going to make a brief introduction, then hand you over to the team to take you through the financials, the grocery market, and the market for supermarket stores. There are three key messages today underpinning why SUPR is in such a strong position for its next phase of growth. Omnichannel stores like ours are increasing grocery market share. SUPR has low leverage, providing us with growth capacity, and we have an accretive acquisition pipeline. Taking those points in turn, we see omnichannel stores continuing to take an outsized share of grocery growth. This is driven both by our tenants' strong performance but also by the slowdown in discounter store openings. Why is this important? It's driving rental growth.
We're already seeing that growth in lease regear evidence, and Rob will take you through that later in the presentation. Turning to leverage, we took active steps to reduce risk in 2023. You may remember that at the start of 2023, we sold our Sainsbury's JV at very attractive levels. We used the majority of the proceeds to pay down debt. The outlook now for the next 12 months is one of reduced borrowing costs but still elevated supermarket yields. So now feels like the right time to be putting capital to work again using the balance sheet flexibility that we have. We can use our information and relationship advantage in grocery to buy stores with attractive return characteristics, and that will help us to grow earnings.
I'll now hand you over to Mike Perkins, who joined us in November as the SUPR CFO, and he'll take you through the financials.
Good morning, everyone. I'm pleased to report Supermarket Income REIT's financial results for the six months to December, 2023. Detailed here on this slide are the key financial highlights for the period, which I'll take you through in greater detail as we step through the presentation. We reported net rental income of GBP 52.6 million, adjusted EPS of GBP 0.029, and we are confident in delivering our full-year 2024 dividend target of GBP 0.0606. Our portfolio was independently valued at GBP 1.7 billion, and as you'll see later on, the impact of the valuation resulted in an EPRA NTA per share of GBP 0.88. Post-debt refinancing, our loan to value is 33%. Turning to the income statement, we have delivered net rental income of GBP 52.6 million, which represents an increase of 15%.
This has been driven by additional rent from new acquisitions, which replaced earnings loss from our joint venture disposal, and to rent review uplifts. In this chart, we provide a bridge in annualized passing rent since June, 2023. Over the six months, passing rent has increased from GBP 100.6 million to GBP 104.7 million. Part of this growth was achieved by two acquisitions, contributing GBP 2.5 million to rent roll and reflected a blended acquisition net initial yield of 6.5%. A further GBP 1.6 million of growth coming from rent reviews, which were settled, on average, 3.6% ahead of the previous passing rent on an annualized basis. We are also pleased to report another period of 100% rent collection. Turning back to the income statement, administrative and other expenses were GBP 7.6 million, a reduction of 4% over the same period last year.
We continue to monitor the operational efficiency of the group through its EPRA Cost Ratio, which improved by 160 basis points to 15.1%. Finance expenses were GBP 8.7 million, representing a decrease of 3% versus the prior period. So bringing this all together, we have maintained our adjusted earnings despite operating at a lower leverage. As you can see at the bottom of this slide, we actively reduced our LTV from 40% in December 2022 to 33% at the period end. And the chart above sets out a bridge in adjusted earnings. The group's divestment of its interest in the Sainsbury's reversion portfolio resulted in a reduction in income from joint ventures of GBP 7.4 million. The loss of earnings was substantially offset by a GBP 6.7 million increase in net rent driven by accretive acquisitions and rent reviews.
Reductions in both administrative expenses and net financing costs have contributed a further GBP 0.6 million in earnings. Taking these movements together, the group delivered adjusted earnings of GBP 36.3 million over the six-month period. The company paid dividends totaling GBP 0.03 per share, up 1%, and was 0.97 times covered by our adjusted earnings. Importantly, the second half of the year will benefit from a full period of rental income from property acquisitions and contractual uplifts across leases subject to review in the six months to June 2024, and we remain confident in achieving full-year dividend cover. Turning to the balance sheet, the portfolio was independently valued at GBP 1.675 billion, down 1.1% over the six months and 3.2% on a like-for-like basis, which has resulted in an EPRA NTA per share of GBP 0.88. Here we set out the movement in portfolio valuation over the six-month period.
Starting with the bar on the left, the group acquired two properties for a combined consideration of GBP 36 million, excluding transaction costs, and represented a blended net initial yield of 6.5%. Now, looking at the valuation movement in greater detail, rental growth in the portfolio contributed to a positive movement of GBP 29 million, which has been offset by an GBP 83 million decline following an outward shift in property yields applied by property valuers. As I mentioned on the previous slide, on a like-for-like basis, the portfolio valuation over the six months was down 3.2%, which compares favorably to the MSCI All Property Capital Index, which reported a decline of 4%. In this chart, we provide a bridge in EPRA NTA per share since June, 2023. The group reported adjusted earnings of 2.9 pence and paid interim dividends totaling 3 pence per share.
The valuation movement, which I discussed on the previous slide, resulted in a GBP 0.046 reduction in NTA. As of 31st December 2023, our EPRA NTA was GBP 0.88 per share. Now, given the uncertain economic and interest rates outlook for much of 2023, we made the deliberate decision to use some of the proceeds from the sale of the Sainsbury's reversion REIT portfolio to pay down debt. As you can see from the chart at the top of this slide, and as previously mentioned, we have reduced LTV from 40% in December 2022 to 33% at the period end. The refinancing of our debt has further increased our significant headroom under both loan to value and interest cover covenants. Our net debt-to-EBITDA ratio remains very strong at 6.1x, and we have low average debt costs of 3.1%.
We're also pleased to announce that Fitch Ratings has reaffirmed the company's BBB+ credit rating with a stable outlook. Our decision to step back from the investment markets to conserve cash during a period of continued volatility now provides the group with capacity for deployment into earnings accretive acquisitions. So now looking at the debt book in more detail, this chart sets out the maturity profile of our loan facilities as of December, 2023. Following our debt refinancing in September, 60% of our committed facilities are now unsecured. In addition, the group has undrawn facilities of GBP 177 million, which includes accordions, and an average maturity of 4.1 years, including extension options. 100% of the group's drawn debt is either fixed or hedged. The company has continued to deliver on its sustainability strategy to improve its ESG performance.
Our strategy is focused on responsible investments for long-term value and is structured by three key pillars: climate and the environment, tenant and community engagement, and responsible business. These three pillars represent the most material sustainability issues for the company and are aligned to the UN Sustainable Development Goals, where the company believes it can have the largest possible impact. We will report on progress against this strategy and the underlying ESG activities in our year-end sustainability report. To deliver the company's sustainability strategy, a number of ESG activities are planned for 2024, both at the portfolio and asset level. Following the publication of our first standalone sustainability report in September, along with our TCFD compliance annual reports, the company has identified a number of initiatives for 2024.
Starting with portfolio initiatives, these include further enhancing our sustainability reporting, including preparing a transition plan and conducting quantitative TCFD scenario analysis, and working with our tenants in developing a nature-related strategy and exploring opportunities for on-site biodiversity pilot projects. At the asset level, 30% of the portfolio now has electric vehicle charging bays installed, and we continue to assess the portfolio for other opportunities with three immediate targets identified. In addition, we continue to support our tenants with the rollout of PV rooftop solar, and 20% of the portfolio has been energized at zero CapEx cost to the company. These systems provide clean energy directly to the store and demonstrate our tenants' commitment to our sites. I will now pass you over to Stephen, who will take you through the grocery markets.
Good morning. I'll start by discussing some of the really impressive numbers we've seen from the grocery market and our tenants before turning to stores in a bit more detail. Firstly, the U.K. grocery market is experiencing strong growth. Since 2017, the grocery market has grown by an impressive 35% to GBP 250 billion today. In other words, GBP 65 billion of growth since we launched the fund in 2017. Given store rents are a factor of turnover, this growth is highly positive to the reversion value of our portfolio. We can illustrate that by looking at how this growth is distributed by channel. This chart shows the breakdown of that GBP 65 billion of growth by channel. Highlighted here in green is the omnichannel segment in which we specialize.
This is the largest growth segment in U.K. grocery, and this growth has been achieved from existing stores with one net new supermarket opening since 2017. To be clear, that means this growth is achieved via like-for-like sales on existing stores just like the ones we own, which is highly positive to the reversion value of our portfolio. In contrast, the second largest growth channel, the discount segment highlighted here in light blue, is substantially driven by 568 new store openings. Let's look at those new store openings in a bit more detail. On this graph, we'll illustrate the historical store openings from the discounters.
As you can see, there's a slowdown in the rate of new stores from both Aldi and Lidl, driven by higher development costs, a lack of sites, and in turn, lower returns from new stores, evidence that this segment may be reaching its market share maturity. Turning back to omnichannel. In these two graphs, we show the total revenue growth versus larger format stores for both Sainsbury's and Tesco's. While UK total growth has been very strong, what's more impressive is that larger format stores have outpaced that growth, up 10.8% and 9.3% respectively, further evidence on how the omnichannel strategy is driving increased volumes for our tenants. And this is delivering a significant shift in our tenants' market share, as shown here, capturing ground on all other grocers over the last six months. 80% of SUPR's portfolio is let to Tesco's and Sainsbury's.
In contrast, the market share for Audi has actually decreased as the growth of new store openings slowed. Putting all of this together, this growth is highly positive to market rents and the reversion of our portfolio, which we're going to take you through in a bit more detail shortly. Turning to stores. This image is our Sainsbury's store in Ashford. It's a top-performing omnichannel store for Sainsbury's, which generates annual sales in excess of GBP 100 million. And we wanted to show how that revenue is generated to illustrate the versatility and resourcefulness of these assets. Typically, 60% is generated in store, their size supporting the full range, serving around 10,000 customers a week. And we're seeing growing momentum behind the larger weekly shops. 10% is generated from essentials, school supplies, pharmacies, and fuels, with food-to-go and EV charging offering significant growth potential.
Of course, 30% is now online, optimal locations for last-mile delivery, with the full range enabling profitable online fulfillment via both home delivery as well as click-and-collect. Let's pause on the growing value from the online channel. 90% of the UK population is less than 35 minutes from an omnichannel store, which now fulfills over 80% of the online grocery market. The grocers are increasingly leveraging the power of this last-mile proximity. For example, 70% of Argos' annual sales are collected at a Sainsbury's store, becoming the largest click-and-collect platform in the UK. The majority of the Argos range can now be ordered and collected same day from a store, becoming an alternative to Amazon. Tesco's has also been leveraging its proximity by expanding its Woosh delivery service from more stores, now covering over 60% of the UK population.
This demonstrates how important our stores are to our tenants' strategy and how that growth will be positive to the long-term value of our portfolio. I'll now hand over to Rob to take you through the investment market in a bit more detail.
Good morning. I'll be taking you through the investment market for supermarket property in more detail. As was the case for the property sector as a whole, supermarket yields widened in the final quarter of 2023, shown here with the gold line, the MSCI Index reporting 6.4% net initial yield. At these levels, supermarkets provide strong relative value compared to all property in blue and logistics, the grey line. While Super's portfolio was not immune to this yield shift, the high quality of its assets means that the portfolio yield at 5.8% remains inside the yield reported by MSCI, which is very much an average of the whole market, including weaker performing stores as well as sub-investment grade covenants.
It is this strong relative value, along with its defensive characteristics, that means supermarket property investment volumes have remained strong, achieving a record of GBP 2.1 billion in 2023, over half of which was driven by operator sale and leaseback activity, of which Asda was the largest at GBP 650 million. We have also seen an active investment market so far this year with increased competition for assets, suggesting that the market has found a floor and supporting the case for a tightening of yields in 2024 as investors look to a lower prospective cost of debt. As sector specialists, we have full visibility of the market, and I'll now take you through where we have been seeing these investment volumes, along with case studies for each of the four distinct strategies for investors in supermarket property.
Firstly, long-lease assets led to investment grade covenants, which are being targeted by unlevered institutional investors. For example, Sainsbury's in Chadwell Heath, which was acquired by Aberdeen with the recently regeared 15-year inflation-linked lease pricing at 5.25%, highlighting the yields achieved for long leases to the strongest tenants. Then there are the regear opportunities, where the covenant strength remains but the lease is shorter in length. These stores will typically have been the original sale and leasebacks of Tesco's and Sainsbury's in the early 2000s. The example here is a strong trading omnichannel Tesco store in Edinburgh, which is over-rented and with a 7-year remaining lease term, which priced at a yield of 7.6%, with opportunistic purchase at ICG taking advantage of a seller under pressure in the second half of 2023.
If this store were to come to market today, we would expect to see both strong demand and pricing. The next set of opportunities in the market are where there are weaker covenants of Asda, Morrisons, and Waitrose undertaking sale and leaseback transactions, which has generated strong interest from institutions. This was evident in the Asda sale and leaseback, which had 4 credible bidders for the whole portfolio, with US triple net lease specialist Realty Income acquiring the 26 stores for GBP 650 million at a 6.5% net initial yield. Lastly, we have the secondary assets, which are led to the same non-investment grade covenants, where assets are over-rented or of lower quality, with opportunistic purchases attracted by yields of 8%+. Morrisons Gloucester is a good example here, which was acquired by a private investor at an 8.8% net initial yield, with 15 years remaining on its inflation-linked lease.
In terms of acquisition opportunities for Super, we are looking to deploy yields which are accretive to earnings while also maintaining the tenant covenant strength. So as shown here, of these opportunities, we see the strongest value for Super in regears, where as sector specialists, we are able to underwrite the risk better than others while the yields ensure that acquisitions support our ability to grow Super's dividend. But as mentioned, we have seen increased interest for supermarket properties since the start of the year, with operators also buying back stores, and so we expect there to be increased competition for these assets. Turning to our portfolio, which we will be looking to grow in the coming year from the current 55 stores, which is weighted towards Tesco's and Sainsbury's, and of which 93% are omnichannel.
Bottom right of this page, you can see that Super's portfolio rents remain highly affordable at an average of 3.8% of store turnover. We are seeing evidence in the market away from Super's portfolio that demonstrates higher rents being agreed on lease regears for strong performing stores in line with higher store revenues. You can see here starting rents of GBP 26 per sq ft and above, but importantly, at 4% of store turnover, which is the benchmark for affordability. In the case of the Sainsbury's store in North London, a rent to turnover of over 5% was agreed at GBP 35 per sq ft for a lease term of 20 years. Again, this evidence supports the affordability of rents in the Super portfolio at an average of GBP 23 per sq ft and 3.8% rent to turnover.
Finally, and as I've already mentioned, we see supermarket property providing strong relative value at current pricing. Returns here are shown compared to 10-year gilts on the left and also Tesco bonds, with property producing a 12% levered IRR, which we view as particularly attractive when you consider that 78% of Super's leases are inflation-linked, 80% of the portfolio is let to Tesco's and Sainsbury's, and that we have had 100% occupancy and rent collection since IPO. I'll now hand you back to Ben.
To conclude, we have an investment strategy which is underpinned by growth in the grocery sector. Super has a strong balance sheet with highly visible, highly contracted cash flows. We've got accretive acquisition opportunities where we can deliver earnings growth using our balance sheet flexibility. Super delivers secure income and highly attractive total returns. Thank you, everybody. I would now like to open up to questions. I'll sit back down.
Lauren Jacoban from Berenberg. Couple of questions. Firstly, you've obviously got capacity now to make some acquisitions. Can you give an indication of how much you'd be happy to spend and where you'd like to see the loan-to-value reach? And then the second question, the 3.8% what was it? Rent to turnover. When you look at it and break down, I mean, obviously, that's an average. When you look at your portfolio at the moment, what percentage would you say is over-rented versus under-rented? Just to give an indication.
Sure. Should I take the one on the acquisitions, I think the policy has always been to not exceed 40% loan-to-value. And I think we feel, given the backdrop now and the greater certainty around long-term rates, I think we feel comfortable being closer to 40 but probably not quite that high. And that would give us, what, GBP 200 million of acquisition capacity. And then on the 3.8, I mean, obviously, we have a distribution around the 4%. I think our view is that actually well, I think our underlying view is that we see stronger rental growth probably than the real estate market does. And so I think we'd argue that much less of our portfolio is over-rented in the long term than people think. But I think the distribution is pretty much kind of 50/50 around the 4%.
Ben, I'll probably just add something around this. So I think if you take the examples I had on the screen, we are seeing those regear rents at GBP 26, GBP 27 per sq ft. If you look at a kind of market rental index, it will tell you market rents are maybe GBP 22 per sq ft. But the point for us there is regear rents don't count as evidence towards that data. And we are seeing that regear evidence that shows you 4% at higher rent per sq ft. But that will not, as I say, kind of be included when you see a value as ERV number.
Thanks. Morning, Thomas and the Goldman Sachs. Just a question on EPRA like-for-like. Net rental income was 2.5% in the period. Your caps are sort of averaging, I think, around 4%. So I think it implies for the period, not all leases were hitting the caps. If that's right, is it fair to think that for the full year, we could actually see that like-for-like net rental income number accelerate slightly?
Rob, say something.
Yes. So I think we had a slide looking at the growth in passing rent over the period. And the average annualized rent reviews in the period was 3.6% up in previous passing versus our sort of weighted average cap across the portfolio of 4% and the floor of 1%. So yeah, sort of close to the cap in the period. And as I mentioned, we've got probably approximately a quarter of the portfolio subject to review in the second half where we expect to see some further rental growth.
Do you agree we should catch up in the second half of the year? That's the difference between the 3.6 and the totals, which averages about 2, because we've got to catch up in the second half.
Got it. Thanks. And then just on rooftop solar, I think there was an asset you mentioned in the report, Thetford, that went from EPC C to B as a result. Was there any associated valuation benefit that you could identify from that upgrade at all?
I'm trying to think. Yeah, not at this moment. But I think what we might see over time is if stores are not of the kind of sufficient minimum level, that might be where you see valuations marked down. So rather than kind of valuation premium, it would become more of a discount. But we've not really seen that yet. I think it's probably too early to say when the legislation hasn't been settled how it's going to apply to long leases, commercial buildings. But I think the net positive for us is zero cost to us as a landlord. Our tenants are really committed to sustainability. So we see these works, not just rooftop solar but kind of store fit-outs, store refresh programs that improve the sustainability of the buildings but at zero cost to Super.
Thank you.
Hi. Denise Newton from Stifel. Just thinking about your acquisitions, and obviously, they start to make sense if you have sort of positive yield spreads over financing costs and you're confident that's stabilised. You said that there were some transactions in Q1 that are getting done now that weren't getting done in Q4. I just wonder if there's more detail on where they sit in your sort of table of investment opportunities. Are those the sort of things that you're looking at, or are those sorts of transactions included in what was getting done in Q4 last year?
Should I take that one as well? So there was one really good example of a store that was under offer, went under offer in Q3 last year. It was one of the shorter lease regear type opportunities. That had gone under offer. The deal fell over in Q4. It came back to market in January. When it went under offer in Q3, Q4 last year, there was only one bidder. So they were getting a discounted price. It came back to the market in January. There were four bidders for that store. It went under offer, and there were a couple of overbids after that. It, of course, then went under offer at a tighter price than had been agreed late last year.
So I think we've just seen that kind of shift since the start of this year with that increased interest, where some of the stores where the market was perhaps a bit risk-off looking at shorter leases, overrent, there is now more demand coming back in. But as I've mentioned, that's where we see the opportunity as well.
Thanks.
I've got a couple of questions online. I can address. So from Shore Capital asking our view of portfolio ERV, I think the answer to that is we think we're slightly under-rented on average. So you can extrapolate from we think the right rent to turnover is 4, and we're about 3.8 at the moment. So I can't do that math in my head, but it's quite simple math to do. And then two opposing but related questions. One is, what are we thinking about issuing equity? And the other one is, what are we thinking about buying back shares? So clearly, issuing equity isn't on the cards anytime soon. We're very just focused on driving shareholder value and driving earnings. And then on share buybacks, capital allocation and discipline is a constant conversation with the board.
At the moment, we see more value for shareholders in deploying our balance sheet flexibility and acquiring attractive acquisitions. Should the discount widen materially, then I'm sure that discussion might change. But as I say, it's something we consider at every board meeting. If there aren't any more questions, we can wrap up there. Thank you very much for.