Thank you for joining us for Supermarket Income REIT's full year results for the year to 30 June 2023. Haf will take you through the financials, Steven is going to update you on the grocery market, and Rob will take you through developments in our portfolio. Before we get into that, I wanted to reflect on a challenging but very busy year for us. It's really easy to forget that grocery has continued to be a growth sector. Due to the lack of suitable sites, we expect to see very little new space added going forwards, so our omni-channel stores will continue to take an outsized share of that growth. We can deliver long-term sustainable returns because we've been extremely active in recycling capital into high-yielding opportunities. We've maximized returns from our Sainsbury's JV, and we've reduced and hedged our debt.
We have a robust balance sheet position for the year ahead, and all of that means that we're cautiously optimistic about the next 12 months. I'll now hand you over to Haf, who's going to take you through the financial results.
Thank you, Ben. Good morning. I'm pleased to report the financial results for the year ended 30th of June, 2023. In terms of financial highlights, Super now has GBP 1.7 billion of total assets, a WAULT of 14 years, with our portfolio valued at a 5.6% net initial yield. An EPRA NTA of GBP 0.93 per share, which is an increase of GBP 0.01 since our last reported results in December. EPRA LTV at the year-end was 35%, and following the debt refinancing, which was announced last week, has reduced further to 34% as at today. We announced this morning an increased dividend target for FY 2024 to GBP 0.0606 per share. Let me now take you through the results in more detail, starting with the income statement.
Net rental income was GBP 95.2 million, which is up 32% from GBP 72.1 million, primarily on the back of new acquisitions, which I'll now take you through on the next slide. Here, we have provided a rental bridge showing the growth in passing rent. We are pleased to announce that we reached the corporate milestone of reporting a rent roll of over GBP 100 million, with annualized net rental income standing at GBP 103 million, up from GBP 80.2 million in the prior year. This was driven through growth from nine new acquisitions during the year, contributing GBP 20.7 million to the rent roll, which will more than offset the loss of income from the Sainsbury’s Reversion Portfolio, which we sold during the year.
A further GBP 2.1 million of rental growth also came from rent reviews, where for the leases which reviewed in the year, we received an average rental uplift of 4.1%. Let me now take you through that 4.1% in more detail. As you can see on the left of this slide, 56% of our leases have annual uplifts, with the remainder predominantly coming from five yearly. Moving on the right of this slide, the rental increases during the year were driven by 15 annual reviews, which generated an average rental uplift of 4.1%. Turning back to the income statement overview, net income from our joint venture was GBP 11.7 million and reflects our investment in the Sainsbury’s Reversion Portfolio.
The reduction in earnings is as a result of the group selling its stake in the joint venture to Sainsbury's partway through, through the year, and I will come back to the returns achieved later in the presentation. Administrative and other expenses were GBP 15.4 million, which is up from GBP 13.9 million as we've continued to scale the business through greater assets under management. However, as you can see at the bottom of this slide, that scale continues to deliver cost savings to shareholders, with our EPRA Cost Ratio falling year-on-year and now stands at 15.5%, compared to 16.5% in the prior year. Finance expenses have increased to GBP 34.3 million, up from GBP 13 million since last year.
This largely reflects the additional borrowings during the year, but more importantly, does not take into account the benefit from fixing 100% of our debt costs through hedging, resulting in total EPRA earnings of GBP 57.2 million. We consider adjusted earnings to be a better reflection of the group's core recurring earnings, which have increased to GBP 72.4 million, which is up 26% from GBP 57.4 million in the prior year. I will now take you through the adjustments on the next slide. EPRA earnings does not take into account the benefit of hedging using interest rate derivatives. We have therefore adjusted for this item to reflect 100% of our debt costs being fixed.
There were also two one-off items in relation to the costs of moving Super from a secured to an unsecured debt structure, and the arrangement fee paid on the acquisition of a further 25% stake in the Sainsbury’s Reversion Portfolio. Let me now take you through that transaction in more detail. On the next slide, we have shown the value creation achieved from the acquisition and subsequent sale of the additional stake in the joint venture during the year, which unlocked GBP 16 million of value to the company.... Super acquired British Airways Pension Scheme's interest in the joint venture for GBP 196 million. This was at a discount of GBP 4 million, and importantly, fully funded the cost of the arrangement fee payable to finance the acquisition.
Super incurred interest costs of GBP 2 million, which are fully offset by GBP 2 million of rental income. Through the efficient unwind of the structure, we managed to unlock GBP 16 million of value, which importantly, is not recognized through EPRA earnings. Based on adjusted earnings, our dividend cover stands at 0.97 times. However, we are confident that with future rental uplifts and lower leverage, we will be able to report a fully covered dividend for the next financial year. Moving on to the statement of financial position. Gross assets stand at GBP 1.873 billion, up 4% from the prior year.
The business has not been immune to a fall in property valuations, and as a result, our EPRA NTA per share now stands at GBP 0.93 per share, compared to GBP 1.15 per share in the prior year. We note, however, that valuations have remained flat since our last reported December valuation, which I'll now take you through on the next slide. If we now look at our direct portfolio, as reported in December, our valuations fell GBP 230 million, following a sharp adjustment in interest rates, with property yields increasing to accommodate a higher risk-free rate and higher cost of capital to investors. Valuations have since stabilized in H2, with yields remaining broadly flat compared to December, with our portfolio now valued at a 5.6% net initial yield.
Looking at this on a fund level, we can see that the fall in property valuations has been the primary reason for the, for the fall in EPRA NTA in the first half of the year, from 115 pence per share to 92 pence per share. However, in the second half of the year, the stabilization of the valuations, coupled with a gain on disposal of the Sainsbury’s Reversion Portfolio, has resulted in EPRA NTA per share increasing by a penny to 93 pence per share. Turning now to debt. After the year end, we carried out a comprehensive debt refinancing program, which has strengthened and improved the flexibility of our balance sheet. Let me now talk you through that in more detail.
Using the proceeds from the Sainsbury’s Reversion Portfolio, we took the active decision to pay down debt and reduce our LTV from 40%, as reported in December, to 34% today. We have increased our weighted average debt maturity by 13 months through a combination of canceling a number of our shorter-term arrangements and adding two new debt facilities. Our weighted average cost of debt has marginally increased to 3.1%, however, is fixed for the remainder of the debt term. We continue to see strong appetite for Super's credit and have increased the number of lenders in our banking group from seven to eight , having brought in new lender, Sumitomo Mitsui. We've also reduced the average hold of our lenders, thereby increasing future debt capacity for my existing banking group, if needed.
As a result of this exercise, we've improved the flexibility of our balance sheet by increasing our unsecured facilities from 48% to just over 60% today. Super's balance sheet continues to be in a very strong position. We've maintained significant operating headroom under both loan-to-value and interest cover covenants, where values will need to fall by a further 44% before we breach covenants at a group level. Our weighted average debt maturity now stands at over four years, with the LTV today at a comfortable level of 34%. Let me now talk you through our hedging strategy, which was designed to protect our dividend. At the end of the last financial year, 60% of our debt was already fixed or hedged to a fixed rate.
Early in this financial year, we took the decision to increase the proportion of fixed debt to 100% by entering into new interest rate derivatives. That decision has paid off, as we've seen sharp increases in interest rates over the last year, which has resulted in our hedges being significantly in the money at the balance sheet date. As part of our comprehensive debt refinancing exercise, we recycled the value of our in-the-money hedges to extend the term by a further 12 months at no additional cost to the company, fixing the company's debt at 3.1%. Sustainability forms a key part of our long-term strategy, and Super has made good progress on all four of its sustainability priorities.
As part of its commitment to mitigate environmental impact, we are pleased to report that Super has produced its first fully TCFD compliant annual report this year. In line with the importance placed by Super on good corporate governance, the investment advisor will be reporting against UNPRI and has become a signatory of the Net Zero Asset Managers Initiative. On stakeholder engagement, Super has continued to improve the quality of data collected from its tenants. And lastly, on citizenship and communities, Super will work with the investment advisor to improve the quality of its social reporting and engage in charitable initiatives. I'll now hand it over to Steven, who will take us through the grocery market.
Thank you, Haf. Good morning.
Clearly, it's been a tough year for consumers, given the high levels of grocery inflation. However, inflation does convert into grocery market growth, and we wanted to start by highlighting some of the key features over the last 12 months. Firstly, grocery inflation has been exceptionally high, peaking at 19%. We're starting to see the discounters slowing growth in new stores due to a lack of suitable sites. Tescos and Sainsbury's are benefiting from their existing and well-located stores, and through their omni-channel strategy, further consolidating their position as market leaders in online grocery, with the online grocery channel remaining buoyant at a 12% market share. Now, U.K. grocery is a strong growth sector. Since 2017, the grocery market has grown 30% to GBP 242 billion today.
When we think back to when we launched the fund in 2017, it would have been unthinkable that the grocery market would increase by close to a third within this period. Given store rents are a factor of turnover, this market growth is positive to the reversion value of our portfolio. We can illustrate that by looking at how this GBP 57 billion of growth is distributed by fulfillment format. As highlighted in green, GBP 16 billion of this growth is omni-channel. Omni-channel is the largest growth format in U.K. grocery, and our deliberate decision to focus our investment strategy on omni-channel stores is how we're tapping in to this growth format. We can illustrate the value of this focus even further by overlaying that growth at a property level.
As you can see, in the case of omni-channel, growth has been compounding on existing bricks and mortar, with one net supermarket opening during this period. In contrast, the discount segment, where growth is substantially driven by new store openings. This demonstrates how our omni-channel store portfolio underpins not only our core income return, but also generates favorable driver for future ERV and reversion value growth. Here we illustrate grocery inflation in the blue line and the average rent review cap of 4% in the gold line. Now, grocery inflation sits significantly higher than store rent reviews, and we illustrate that difference in the green area of this chart. As store sales grow in line with inflation, the affordability of our rent is increasing, resulting in a highly attractive rent turnover ratio.
Super's average rent to turnover today is 3.8%, which compares favorably to the UK grocery average of 4% and highly favorable to other consumer service property sectors. Turning to yields. On this graph, we show the MSCI yield series for supermarkets, all property, and logistics. Turning to the right of this graph, you can see the relative softening of yields and the rebasing of values since September. Supermarket yields quickly rebased to a higher interest rate environment with yields of 5.9%, that's now a hundred basis points wider than all property. However, as Haf noted earlier, encouragingly, yields have remained stable in the second half of this year. Now, investment volumes in supermarkets have remained strong. On this graph, we show how supermarket investment volumes over the last five years.
On the right, you can see in 2023, over GBP 1.7 billion has been invested in U.K. grocery property, and we can analyze who's buying. Investment market transactions, shown here in gray, account for GBP 1.3 billion or 76% of total volumes. We can show Super's volumes here in gold at GBP 400 million from the redeployment of our sale proceeds on the SRP. In addition, Tescos and Sainsbury's remain active in acquiring their own leasehold property, accounting for GBP 500 million of that volume. It's worth noting the supply and demand dynamic in supermarkets is unique, given our tenants' buyback activity of their own leasehold stores. It's no surprise to us that Tescos and Sainsbury's are buyers of their own leaseholds, given the long-term value we see in supermarket property.
I'll now hand you over to Rob, who'll take you through our portfolio in more detail.
Haf has already taken you through the numbers as at the balance sheet date, so as usual, I'll be taking you through the portfolio as at today. We have continued to grow and diversify our assets, with a passing rent roll now standing at GBP 103 million, which is a secure income stream, as evidenced by 100% rent collection since IPO. And that income continues to grow through rent reviews, of which 78% are inflation linked. Our unique portfolio now stands at 55 supermarkets, of which 93% are omni-channel. And as Steven has mentioned, with store revenue growth, our rents now represent a highly affordable 3.8% of store turnover, which is below the market standard of 4%. We have been actively managing the portfolio during the year.
Firstly, realizing significant value through the disposal through the GBP 430 million disposal of Super's interest in 21 stores in the Sainsbury’s Reversion Portfolio, at a 4.3% net initial yield. Whilst we have deployed GBP 399 million into 11 strong trading omni-channel stores at a 5.5% net initial yield. An example of the value opportunities we are able to identify is Tesco Worcester, which was acquired in an off-market transaction in April of this year at a 6% net initial yield, with a 12-year remaining lease term, and it also has an RPI-linked lease with annual reviews capped at 4%. This strong trading store ticks all the boxes for Super's investment criteria, delivering around GBP 65 million of annual site revenue, making it a top quartile trade for Tesco.
Whilst it also acts as an omni-channel hub, with nine home delivery vans fulfilling online grocery orders. We are also looking to add value through development of new discount food stores, alongside our existing strong trading supermarkets at our larger sites. With examples here at Bristol, Basingstoke, and Newcastle, enhancing the sites as grocery destinations. Steven has already spoken to the challenges for new store openings, with strong locations becoming increasingly scarce, making the prime grocery locations in our portfolio increasingly attractive for the discounters with their ambitious growth plans. And through these developments, we are targeting a yield on cost of 7%. Our asset level initiatives also involve sustainability. 20% of our portfolio now has solar panels, and we are supporting our tenants on further rollout across the portfolio.
Similarly, 20% of the portfolio now has EV charging, and we have five sites under development with Osprey. Given the net zero targets of our tenants, these initiatives are typically achieved at no capital outlay for Supermarket Income REIT. Finally, just turning to our portfolio of non-grocery assets. As a reminder, when acquiring the U.K.'s strongest performing supermarkets, we sometimes also acquire adjacent units which are complementary to the supermarket. These assets represent just 6% of the portfolio, are held at a conservative 8% net initial yield, and of which over 75% is essential retailers. I now hand you back to Ben.
Thank you, Rob. So before we turn to conclusions, I wanted to touch on why we like investing in omni-channel supermarkets so much. So here we've compared the returns on gilts, Tesco bonds, and top-performing supermarkets at current prices. You can see that we expect supermarkets to deliver a long-term 12% return. Now, that looks highly attractive to us, especially when you consider that in the case of Super, 77% of the rent is coming from Tesco and Sainsbury's, 78% of the rent is index-linked, and we've had 100% occupancy and rent collection since our IPO. So to conclude, we have an investment strategy which is underpinned by strong growth in grocery.
We've made significant steps forward in sustainability reporting and sustainability commitments, and we've been extremely busy recycling capital, squeezing even more value out of our JV portfolio with that GBP 16 million of additional proceeds that we realized, and actively refinancing and hedging to strengthen our balance sheet. All this means that Super can deliver sustainable, secure income and attractive long-term total returns. Thank you. I'll now open up to questions. John, if you could just wait for the mic, that'd be great. Thank you.
Good morning, John Cahill from Stifel . Thanks very much for the presentation. A couple of questions. One, in the investment market, you gave a breakdown of, you know, what you guys have been buying and the operators themselves, and the largest category is still the sort of other, you know, other, other, investors in the sector. Could you maybe give a bit of detail on, you know, who they are? We know we can see Realty Income, for instance, have been buying, what kind of stores they're buying and their motivation for it. And the second question is that the affordability of the rents from the tenant's perspective is obviously getting better and better and has been for some time. Where are rents, do you think, in the portfolio on the index side, versus current open market rents?
You know, are you overall market rented, under rented, over rented?
I'll take the first one, and then I'll ask Rob to take the second one. So yeah, it's a good question. In terms of the investment market transactions during the period, I mean, there's roughly been around 25 deals within that data set. It's been quite a mixed bag of buyers, given the value that's in grocery property right now. So some of the names who have been buying during the period, you mentioned Realty, but CBRE Global Investors. At the same time, we've seen BlackRock, PIMCO, and Hermes acquire supermarkets. And I think that's reflective of the types of transactions that we're seeing during the period.
And then Rob, on rents?
Yeah, sure. So good question, John. So we talked to the 3.8% to turnover, so that's obviously the key benchmark for the operators. On a rent per square foot basis, that equates to around GBP 23 per sq ft, so still compares well. I guess the answer is, there are some stores that have been on index-linked leases for 23-24 years. So, there is some that are a bit more over-rented, but that will be factored into the valuation yield. So, yeah, I think broadly across the portfolio, we'd say we're rent-rented or slightly ahead. But there will be some that are slightly over and some that are under.
Morning, it's James Carswell from Peel Hunt. I appreciate the JV with Sainsbury's has been really successful, and I apologize because I'm now gonna pick on the one maybe negative. But the one store that's vacant, I think the statement mentions you expect to receive about GBP 1.5 million back from that store, so I think your share is roughly GBP 3 million kind of book value. If it's the store I think it is, I think it had a rent roll of about GBP 2 million per annum. I don't think that's... Yeah, in terms of the vacant possession value, I mean, presumably that's not representative of the rest of the portfolio. I don't think it is. I'm just wondering why the vacant possession value of that store was so low. Thank you.
I mean, I'll, I'll say that. The transaction as a whole was a portfolio transaction, and we, you know, we don't generally like doing portfolio transactions because, you know, there are always some weaker stores within those. We always underwrote that there were gonna be five that were at risk, and that store, which we can name 'cause it's been named now as Coventry, and we always thought that was at risk of closure. And that's how we underwrote it on the way in. So actually, I think the positive is that Sainsbury's actually committed to the other four that we thought were potentially at risk, and that's actually delivered some more returns to shareholders.
But yeah, and we would never have bought that store or even potentially some of the others originally, as standalone transactions. It came as part of the deal, and as part of the deal, the returns made sense.
Okay, thanks.
Thanks. Sam Knott from Kolytics. I just have one question on the investment rationale in the market. So you did about GBP 360 million of acquisitions, at sort of 5.5%. What did you see there that made that look attractive relative to... If that's similar to your portfolio, which you could buy in the market at sort of a 15%-20% discount, what made those attractive as opposed to share buybacks to just sort of reinvest in your existing portfolio?
Yeah, I mean, we've always got an eye to, you know, capital discipline, and that sort of—it's a, it's a blend of kind of what's the right leverage point for the, for, for Supermarket Income REIT, achieving dividend cover, and also then obviously returns from, from deploying, deploying capital. And so, you know, in order to rebuild the income side, having sold the JV, you know, we needed to acquire further assets. Yet the returns we're underwriting there are commensurate with the kind of returns we think you get from owning the shares, and so that in the round then, then makes sense, right? I think we've got a couple of questions online on share buyback, so I might as well hit those while we're, while we're doing it. And actually, interestingly, a related one about why don't we reduce debt?
So, you know, I think in order to fund share buybacks, we would have to do that through increasing debt. You know, we don't think that's a prudent thing to do right now. We feel very comfortable with our current level of leverage, but, you know, I don't think the right thing to do is to increase leverage right now. It's a conversation that we have on an ongoing basis with the board. You know, if we think it is the right way to deploy capital, then it's absolutely something that's considered in the round with everything else.
Thanks. Emma Bird from Winterflood. I think you did just touch on it there, but just checking, so are you happy with the current level of leverage, or would you like to sell more assets to reduce debt further?
Yeah, as I said, it's a question of balancing lots of different things, like returns, where we're comfortable with leverage, and also achieving dividend cover. And so I think actually Haf can talk to the valuation decline we'd need to, you know, to be at even 40%.
Yeah. So I guess just touching on that, valuation need to fall by over 40%, for us to kind of breach our covenant. So we feel that 34% is actually a comfortable level to be at, take into account, you know, potential moves in the future.
Good morning. It's Edoardo Gili from Green Street. My question is around, your, your portfolio is mostly omni-channel, as you mentioned, but do you have a split of sort of physical sales versus, online fulfillment versus click and collect? Just some numbers, if you had, sort of an average.
Sure.
All right.
Yeah, thanks, Eduardo. So, yeah, typically, on average, it'll be, say, 75% in-store, and then between 20-25% for online, which is typically 20% of home delivery, and then 5% click and collect. Click and collect is a relatively small channel, but that's one we've seen increase quite significantly since COVID, so that's probably one of the large growth areas.
Thank you. And maybe, a second one, if I can. Around your, your hedging strategy, could you give a bit more color around the rolling off of your, your hedges over the next couple of years?
So our hedges go out for three years, which actually takes us through the peak of the interest rate curve. So we're confident that with future rental uplifts on a kind of annualized basis, and with lower leverage, that we'll be kind of dividend covered going forward. And actually, that break-even SONIA rate is probably where the kind of curve is predicting at the moment, so we're comfortable with the, with the hedging strategy that we've put in place.
Thank you.
Okay, if there are no more questions, I'd like to just say thank you very much for your time this morning. Looking forward to having a chat, if you can hang around for a few minutes for a coffee.