Supermarket Income REIT plc
Annual Report 2019

Plain-text annual report

SUPERMARKET INCOME REIT | ANNUAL REPORT 2019 CLICK & COLLECT AT STORE TRADITIONAL IN-STORE HOME DELIVERY FROM STORE INVESTING IN THE FUTURE MODEL OF UK GROCERY STRATEGIC REPORT | WHO WE ARE Supermarket Income REIT plc (LSE: SUPR) is a real estate investment trust dedicated to investing in property which enables the future model of UK grocery. We invest in omnichannel supermarkets: TRADITIONAL IN-STORE CLICK & COLLECT AT STORE HOME DELIVERY FROM STORE With highly attractive lease terms: LONG LEASE LENGTHS INFLATION LINKED RENT REVIEWS STRONG TENANT COVENANTS 18 YEARS AVERAGE UNEXPIRED LEASE TERM1 UPWARD-ONLY INFLATION LINKED RENT REVIEWS MORRISONS, TESCO AND SAINSBURY’S Providing regular, sustainable, inflation-linked income with strong total shareholder returns: 5.6 PENCE 8.0% 5.8 PENCE TOTAL DIVIDEND DECLARED FY 19 TOTAL SHAREHOLDER RETURN FY 19 TARGET DIVIDEND FY 202 1 Excludes post balance sheet event 2 This is a target dividend not a forecast CONTENTS STRATEGIC REPORT 1 Highlights 2 Chairman’s Statement 4 Key performance indicators 5 Our Portfolio 9 14 Our Market 20 Our Principal Risks Investment Adviser’s Report CORPORATE GOVERNANCE 26 Board of Directors 27 Investment Adviser 28 Corporate Governance Statement 33 Audit Committee Report 37 Directors’ Report 39 Directors’ Remuneration Report FINANCIAL STATEMENTS 44 Independent Auditors’ Report 50 Consolidated Statements 54 Notes to the Consolidated Financial Statements 75 Company Statements 77 Notes to the Company Financial Statements 79 Unaudited Supplementary 42 Directors’ Responsibilities Information Statement 43 Alternative Investment Fund 83 Glossary 84 Contacts and Company Manager’s Report Details 2 S U P E R M A R K E T I N C O M E R E I T P LC STRATEGIC REPORT | HIGHLIGHTS FOR THE YEAR FINANCIAL HIGHLIGHTS EPRA EPS Quarterly dividend per share EPRA NAV per share Total net assets Annualised passing rent Loan to value Portfolio net initial yield Total shareholder return 30 June 2019 30 June 2018 5.0p 1.419p 97p £230.5m £19.2m 36.3% 4.9% 8.0% 3.8p1 1.375p 96p £176.7m £13.7m1 32.4% 4.9% 8.0% Change +31.6% +3.2% +1.0% +30.4% +40.1% +3.9%3 – – • Quarterly dividends up 3.2% since September 2018 in line with UK RPI inflation • Investment properties independently valued on 30 June 2019 at £368.2 million (2018: £264.9 million) › 4.8% growth above the Portfolio acquisition price (excluding acquisition costs) › 1.3% up on a like for like basis • 3.2% average rent review increase for the Year in line with UK RPI inflation (2018: 3.6%) BUSINESS HIGHLIGHTS • Acquisition of two accretive omnichannel supermarket assets at an aggregate purchase price of £96.7 million: › New assets average acquisition NIY 5.1% vs Portfolio average of 4.9% › New assets 21 year WAULT vs Portfolio 18 year WAULT • £56.3 million total equity raised in the Year › £45.0 million oversubscribed Placing and Offer for Subscription in March 2019 › £11.3 million issued in part consideration of a supermarket acquisition in April 2019 • Justin King former CEO of Sainsbury’s joined Atrato as Senior Adviser March 2019 POST BALANCE SHEET EVENTS • Acquisition of an eighth supermarket, a Sainsbury’s superstore in Preston, Lancashire with an unexpired lease term of 23 years, for £54.4 million (net of acquisition costs), reflecting a net initial yield of 5.1% • £47.6 million debt facility and an uncommitted £40 million accordion option provided by Deka Bank, fixed at 1.9% for the five year term of the facility 1 2018 comparative period is for the 13 months from 1 June 2017 to 30 June 2018 2 FTSE EPRA NAREIT UK index 3 Movement in percentage A N N U A L R E P O R T 2 0 1 9 1 STRATEGIC REPORT | CHAIRMAN’S STATEMENT I am delighted to report to you another year of strong performance by the Group and am pleased to present the Group’s results for the year ended 30 June 2019. Overview We invest in omnichannel stores which we believe are the future model of grocery in the UK. Omnichannel supermarkets operate both as physical supermarkets and as online fulfilment centres. Our Portfolio is let on fully repairing and insuring lease terms (“FRI”), with upward-only, RPI-linked rent reviews, providing an annualised passing rent roll of £19.2 million with a current weighted average unexpired lease term of 18 years3. This stable, inflation linked income stream enabled us to declare dividends totalling 5.6 pence per share for the year (13 months to 30 June 2018: 5.5 pence), and we are announcing a further 2.9% increase in our quarterly dividend target from October 2019 to an annualised 5.8 pence per ordinary share, with the first quarterly dividend of 1.46 pence per share expected to be declared in January 2020 and paid in February 2020. We are again increasing the dividend in line with UK RPI inflation for the year. We have acquired three additional supermarkets (including one post balance sheet) totalling £151.1 million. The new assets are accretive to both portfolio yield and portfolio unexpired lease term. These acquisitions were in part financed by the oversubscribed £45.0 million share placing in March 2019 and the allotment of £11.3 million of Ordinary Shares in April 2019. The latter was made in part consideration for the purchase of the Tesco Extra supermarket in Mansfield, Nottinghamshire for £45.0 million. We are especially pleased to have been able to use Ordinary Shares in the Company as part consideration in a supermarket acquisition for the first time. We believe there are many owners of supermarket properties that would benefit from swapping their ownership into shares in Supermarket Income REIT, gaining both diversification, specialist management and the benefits of our REIT corporate wrapper. 2 S U P E R M A R K E T I N C O M E R E I T P LC Nick Hewson Chairman Financial results The Group’s investment properties were independently valued on 30 June 2019 at £368.2 million, an increase of 4.8% above the aggregate acquisition price (excluding acquisition costs) and providing like for like growth of 1.3%. All our properties have contractual, upward-only, inflation-linked rental uplifts and average rental increases were 3.2% in the year (13 months to 30 June 2018: 3.6%). The high degree of certainty of income inherent in the Group’s long, inflation linked, leases, combined with the improving financial performance of the supermarket operators, gives the Board confidence that further valuation growth can be achieved in the future. Our EPRA earnings for the year were £9.9 million (13 months to 30 June 2018: £4.7 million), generating EPRA earnings per share for the year of 5.0 pence per share (13 months to 30 June 2018: 3.8 pence). The Group has a highly-transparent and low cost base. Our EPRA cost ratio for the year was 17.9% (13 months to 30 June 2018: 23.4%), with an ongoing charge ratio, calculated under the AIC methodology, of 1.4% (13 months to 30 June 2018: 1.5%). The Group’s EPRA NAV was 97 pence per ordinary share as at 30 June 2019 (2018: 96 pence). Dividends One of our core objectives is to deliver a high-quality, low-risk income stream to shareholders. We declared four quarterly interim dividends totaling 5.6 pence per share for the year (13 months to 30 June 2018: 5.5 pence). Our EPRA dividend cover ratio was 90% for the year (13 months to 30 June 2018: 92%). We are targeting a 2.9% increase in the quarterly dividend for the year from October 2019, in line with UK RPI inflation for the year, resulting in an annual dividend target of 5.8 pence per share for the financial year ending 30 June 2020. Debt financing As of 30 June 2019, we have drawn down debt facilities totalling £144.9 million, with a further £7.2 million of facilities undrawn at the year end. 3 Excludes post balance sheet events. “ Over the two years since IPO we have delivered Total Shareholder Returns in excess of 16% compared with minus 1% for the sector” We have broadened our banking arrangements during the year, adding Bayerische Landesbank (“BLB”) to our initial relationship with HSBC. This £52.1 million facility has a margin of 1.25% above three-month LIBOR and is secured against the Morrisons supermarket in Sheffield and the Sainsbury’s supermarket in Ashford. This new facility was hedged using an interest rate swap, thus fixing the Group’s cost of debt at 2.55% on this borrowing for the term of the facility. As at 30 June 2019, the Group’s net loan-to-value (LTV) ratio was 36.3% (2018: 32.4%). The Group will target a LTV ratio of 30-40% in the medium term once the portfolio growth phase is complete, which the Board considers conservative, given the low risk nature of the Portfolio. We continue to diversify the Group’s sources of debt finance, adding Deka Bank to our banking relationships and agreeing a new £47.6 million debt facility and £40 million uncommitted accordion facility with them (see post balance sheet events). The average unexpired term of our borrowing is four years (including a one-year extension option on the HSBC facility and the new Deka Bank facility) and our weighted average cost of debt is 2.4% (2018: 2.4%). Our favourably priced debt facilities reflect the quality of the underlying Portfolio and strength of the tenant covenants. Hedging and loan interest Managing risk is essential to delivering the quality of income we are targeting for our shareholders. Our hedging strategy for the Group’s variable rate debt is primarily to use interest rate derivatives, which allows the Group to benefit from current historically low interest rates, while minimising the effect of a significant interest rate increase. The Group has entered into an interest rate cap and interest rate swap instrument to hedge our interest rate exposure on the drawn debt on the HSBC and BLB debt facilities respectively which, when combined with the post balance sheet fixed-rate debt, hedge 85% (2018: 80%) of its drawn borrowings. Our interest rate cap and interest rate swap run coterminous with the respective loan maturities. Further details of hedging facilities can be found in note 16 to the financial statements. Post balance sheet events On 28 August 2019, we completed the acquisition of our eighth supermarket asset, a Sainsbury’s superstore in Preston, Lancashire for £54.4 million (net of acquisition costs), at a net initial yield of 5.1%. The Group has also arranged a new five-year, interest- only loan facility with Deka Bank. The £47.6 million facility, which includes an uncommitted £40 million accordion option, has a fixed coupon of 1.9% and is secured against the Sainsbury’s superstore in Preston, Lancashire and the Tesco Extra supermarket in Mansfield, Nottingham. The accordion allows the Group the option to expand the £47.6 million debt by a further £40 million, subject to Deka Bank credit approval, during the term of the facility. Outlook We are very pleased to have delivered a total shareholder return of 8.0% for the year (13 months to 30 June 2018: 8.0%) and remain confident of delivering continued strong returns for our shareholders. The Board and the Investment Adviser continue to see numerous opportunities in the market which meet the Company’s investment objectives while potentially adding further geographical, covenant and income diversification to the portfolio. These opportunities are still at an early stage and remain subject to the Investment Adviser’s and Company’s stringent due diligence procedures. If these opportunities reach a more advanced stage, they are expected to contribute materially to earnings growth and our progressive dividend policy. Nick Hewson Chairman 3 September 2019 A N N U A L R E P O R T 2 0 1 9 3 STRATEGIC REPORT | KEY PERFORMANCE INDICATORS Our objective is to deliver attractive, low risk returns to shareholders. Set out below are the Key Performance Indicators we use to track our progress. Further details and calculations can be found on page 79. 8.0% FY18 - 8.0% TOTAL SHAREHOLDER RETURN 36% FY18 - 32% NET LOAN TO VALUE 18yrs FY18 - 19 yrs WAULT 18% FY18 - 23% EPRA COST RATIO 97p FY18 - 96p EPRA NAV PER SHARE 5.0p FY18 - 3.8p EPRA EPS 4 S U P E R M A R K E T I N C O M E R E I T P LC STRATEGIC REPORT | OUR PORTFOLIO TESCO, CUMBERNAULD VALUATION AS AT 30TH JUNE: £55.1m PASSING RENT: £3.03m UNEXPIRED LEASE TERM: 21yrs SAINSBURY’S, PRESTON1 VALUATION AS AT 30TH JUNE: £54.4m PASSING RENT: £2.96m UNEXPIRED LEASE TERM: 23yrs TESCO, SCUNTHORPE VALUATION AS AT 30TH JUNE: £55.7m PASSING RENT: £2.98m UNEXPIRED LEASE TERM: 21yrs MORRISONS, SHEFFIELD2 VALUATION AS AT 30TH JUNE: £53.0m PASSING RENT: £2.54m UNEXPIRED LEASE TERM: 20yrs TESCO, BRISTOL VALUATION AS AT 30TH JUNE: £29.6m PASSING RENT: £1.58m UNEXPIRED LEASE TERM: 12yrs SAINSBURY’S, ASHFORD VALUATION AS AT 30TH JUNE: £84.5m PASSING RENT: £3.93m UNEXPIRED LEASE TERM: 19yrs TESCO, MANSFIELD VALUATION AS AT 30TH JUNE: £46.9m PASSING RENT: £2.51m UNEXPIRED LEASE TERM: 20yrs TESCO, THETFORD VALUATION AS AT 30TH JUNE: £43.4m PASSING RENT: £2.64m UNEXPIRED LEASE TERM: 11yrs 1. Asset acquired post balance sheet 2. Image: Our Morrison’s store, Sheffield A N N U A L R E P O R T 2 0 1 9 5 Q&A WITH JUSTIN KING | THE FUTURE OF GROCERY A conversation with Justin King about the future of the UK grocery sector. Justin King is a senior adviser to Atrato Capital, the Investment Adviser to Supermarket Income REIT. Justin is recognised as one of the UK’s most successful grocery sector leaders, having served as Chief Executive of J Sainsbury plc for 10 years until 2014. Prior to that, he was part of the leadership team at Marks & Spencer plc and previously held senior roles at Asda. He is currently non- executive director of Marks and Spencer Plc and a member of the Public Interest Body of PwC and Vice Chairman of Terra Firma. Justin brings a wealth of grocery sector experience and a deep understanding of grocery property strategy. Q: The UK grocery sector is experiencing significant structural change, how do you think this impacts the traditional supermarket shop and is this now a thing of the past? A: There is still no greater retail proposition than a large, grocery led supermarket selling fresh food in the right location. Supermarkets generate significant cash flow, and the core of how and where consumers perform the grocery shop is substantively unchanged. If you look at the UK, the grocery sector is heading to be a £200 billion market and some 60% or £120 billion, is still done in or fulfilled from a supermarket as part of a weekly grocery shop. That cash value is unchanged from 10 years ago. Clearly market growth has come from convenience, discount and online, in that order, but the dominant channel remains, and I believe will remain, the supermarket. Q: Doesn’t online grocery and the shift in growth away from bricks and mortar change that? A: This distinction between bricks and mortar vs online is a largely false one, and will diminish in the future. The line between what is online and what is in-store is already blurred. Take UK online grocery, over 75% is actually fulfilled from a supermarket operating as a hub for click and collect and home delivery, so the share of the market which is fulfilled from the traditional supermarket is actually more than 60% or £120bn. You need to remember that customer preference for choice, convenience and fresh produce combined with operators’ need to optimise last mile delivery logistics, results in large supermarkets being ideally placed to operate as last mile fulfilment centres and that’s exactly what’s happening in what’s now known as omnichannel stores. Q: Do you think there is a threat from the likes of Ocado and Amazon to that model? A: Grocery shopping online is only 6% of the UK grocery market, yet we are 20 years into that journey with every major operator, and a pure play in Ocado, between them investing billions in the opportunity. Today, around 1%, out of 30 million households in the UK, do more than 50% of their grocery shop online, of which most live in the London area. Online grocery remains a minority channel in and of itself. Pure play home delivered grocery has not been profitable, and I believe it is unlikely to ever generate sufficient profit as a standalone sales channel. However, you need to recognise that online grocery is, for most customers, a pivotal part of the overall relationship with the operator. I once described online grocery as no different to selling a can of beans below cost, you do it because your competitors do it, and you accept that it’s required to generate a long term loyal relationship with your customer, and that ultimately drives a profitable overall relationship with the customer. I consider the most significant retail transaction in the last 10 years was Amazon’s purchase of Whole Foods. Amazon was not motivated by acquiring technology, it was a technology company acknowledging that a successful grocery business can only be achieved through well located shops with great customer service, operating an omnichannel business model with a well- developed supply chain. It seems to me that the property market doesn’t understand that when it comes to supermarket property as an investment class. 6 S U P E R M A R K E T I N C O M E R E I T P LC Q&A WITH JUSTIN KING | THE FUTURE OF GROCERY large grocery led omnichannel supermarkets “ There is still no greater retail proposition than selling fresh food in the right location” Q: Do the discounters threaten your view on supermarkets? A: It’s worth remembering that presence of discounters in the UK grocery market is not new, nor is their business model. Aldi and Lidl have opened stores and gained significant market share in recent years, however previous discounter brands such as Netto (acquired by Asda) and KwikSave (acquired by Co-Op) have all but disappeared. The current market share of Aldi and Lidl (14%) is similar to the market share of previous discounters as far back as the mid-80s. The ability of discounters to compete with large supermarkets is limited as most UK consumers cannot meet all their needs in a small 10,000 sq ft discounter store, with 90% of shoppers at a discounter also shopping elsewhere. Most consumers want a wider range of products including well-loved brands and own brand fresh food that are typically not available in discounters. For this reason, among others, I do not believe that the discounters will grow to the same extent as Germany where the discounters hold 40% market share. Aldi and Lidl have not been able to copy the low-cost German model like for like. In contrast, they have been forced to invest heavily on store layout to make them attractive to the British shopper. For example, Aldi’s “Project Fresh” was a £300 million investment in redesigning the store experience with wider aisles, clear signage and more focus on fresh food. This serves to increase the cost base of the store, thereby diluting somewhat the discounters’ cost advantage. I believe discounters are now through the zenith of their expansion programmes and disruption in the UK. They will continue to keep pricing sharp, but not result in further incremental disruption to market share. Q: How environmentally sustainable is the traditional supermarket? A: Sainsbury’s recently celebrated a 150-year anniversary, and it’s worth remembering that Sainsbury’s was founded in response to the largest sustainability issue of the Victorian era, which was how to provide safe affordable food and strengthen the representation of the consumer in the supply chain. Grocery operators have maintained that level of leadership on the most significant sustainability issues of the past 100 years. They were the first to make women a major contributor to their work force and first to implement significant recycling programmes in response to shortages during both world wars and that innovation continues today with environmental sustainability. It is an embedded value of the sector. The grocery operators have one of the clearest articulations of what environmental sustainability means to their business model. Supermarkets have invested significant capital into ongoing carbon reduction initiatives such as solar panels, switching to natural refrigerants, green gas using combined heat and power (CHP) plants and installing LED lighting. The scale of the operator’s business means they can and are making an important contribution to sustainable grocery development in the UK and internationally. Sainsbury’s created five values for environmental and economic responsibility as part of its 2020 sustainability plan and it’s encouraging to see SUPR taking a leading role in recognising how important environmental sustainability is to the operator’s business model, by investing in on-site renewables across its supermarket estate as part of its asset management policy. A N N U A L R E P O R T 2 0 1 9 7 STRATEGIC REPORT | OUR PORTFOLIO NEW ACQUISITION CASE STUDY: TESCO, MANSFIELD A Tesco Extra supermarket located on an 8.6 acre town centre site in Mansfield, Nottinghamshire. The store comprises a 64,000 sq. ft (NSA) Tesco Extra, approximately 530 parking spaces and a 12-pump petrol filling station. The store was originally developed in 2007 and occupies a prominent position as the only large Supermarket inside Mansfield’s inner ring road with the store’s catchment area set to benefit from significant residential development. The store facilitates online fulfilment via click and collect. It was acquired with annual, upward-only, RPI-linked rent reviews (capped and floored) on fully repairing and insuring terms and with the first break being at lease expiry in March 2039. The Group acquired the property in April 2019 for £45.0 million, reflecting a net initial yield of 5.2%. PURCHASE PRICE: £45.0m ACQUISITION DATE: April 2019 PASSING RENT: £2.51m RENT REVIEW BASIS: Annual RPI NEXT RENT REVIEW: March 2020 RENT REVIEW COLLAR: 4% cap, 0% floor LEASE EXPIRY: March 2039 SIZE NSA: 64,000 sq ft 8 S U P E R M A R K E T I N C O M E R E I T P LC Image: Our Tesco store, Mansfield STRATEGIC REPORT | INVESTMENT ADVISER’S REPORT properties operate as physical stores “ Our omnichannel supermarket and online fulfilment centers” Ben Green Atrato Capital Atrato Capital Limited, the Investment Adviser to Supermarket Income REIT plc, is pleased to report on the operations of the Group for the year. Overview The Company’s investment policy is to invest in stores which deliver the future model of grocery in the UK. As grocery retailers are increasingly adopting a strategy of integrating online and offline shopping, with all of the big four operators now utilising well-located stores as last-mile fulfilment centres, the Group targets stores that operate both as physical supermarkets and online fulfilment centres, via home delivery and/or click and collect, with the following characteristics: • large catchment populations and excellent transportation links • long unexpired lease terms with inflation linked rental uplifts • attractive property fundamentals with opportunities for active asset management The financial stability of the grocery sector is improving. In June Moody’s Investors Services upgraded Tesco plc to investment grade (Baa3) following the actions of Fitch Ratings who raised them to the equivalent level (BBB-) in late 2018. Moody’s cited the operator’s improvements in cash generation, debt reduction and their anticipated growth in profits as the reasons behind the positive change. To date, the Group has invested in a portfolio of principally freehold and virtual freehold properties let to Tesco, Sainsbury’s and Morrisons. All of the properties in the Portfolio benefit from contractual RPI-linked rental increases from long dated FRI leases, generating an average unexpired lease term of 18 years. Investment activity The Group acquired two supermarket stores during the year. The Morrisons store in Hillsborough, Sheffield was acquired with an unexpired lease term of 21 years with five-yearly, upward-only, RPI-linked rent reviews, compounded annually, and the Tesco Extra in Mansfield, Nottinghamshire was acquired with an unexpired lease term of 20 years with annual, upward-only, RPI-linked rent reviews. Details of our post balance sheet acquisition can also be found below. Our £151.1 million of overall acquisitions (including post balance sheet events) had a blended NIY of 5.1%, and a blended WAULT of 21 years, which is accretive to the portfolio yield of 4.9% and lengthens the average WAULT across the portfolio, supporting Company’s ability to grow its dividend while enhancing the quality and diversification of the portfolio. Our portfolio of stores comprises the properties in the table on page 11. These omnichannel supermarket properties operate both as physical stores and online fulfilment centres. Each property is located on a large site with the potential for income and capital growth opportunities. The Portfolio benefits from highly attractive leases to strong tenant covenants (Tesco, Sainsbury’s and Morrisons), with upward-only, RPI-linked rent reviews and long unexpired lease terms (weighted average 18 years). The properties in the table on page 11 are listed chronologically in order of acquisition. Acquisitions after the year end date are described in the post balance sheet event note below. Portfolio valuation Cushman & Wakefield valued the Portfolio at 30 June 2019 in accordance with the RICS Valuation Global Standards July 2017. The properties were valued individually without any premium/discount applying to the Portfolio as a whole. The Portfolio market value was £368.2 million, compared with the assets’ combined purchase price of £351.4 million (excluding acquisition costs). This represents an increase of £16.8 million or 4.8%, above the aggregate purchase price. This valuation growth since the acquisition of the Portfolio reflects: (i) the supermarket operators’ improving covenant strength as tenants; (ii) favourable A N N U A L R E P O R T 2 0 1 9 9 STRATEGIC REPORT | OUR PORTFOLIO NEW ACQUISITION CASE STUDY: SAINSBURY’S, PRESTON A Sainsbury’s store comprising 78,000 sq. ft (NSA) located on a 9.9 acre site in Preston, Lancashire. The site has more than 500 parking spaces and a 12-pump petrol filling station. The store was extended in 2010 and now plays an important role in Sainsbury’s online fulfillment network across the Lancashire area. The property is let to Sainsbury’s on a fully repairing and insuring lease with annual, upwards only, RPI linked rent reviews (capped and floored). It has an unexpired lease term of 23 years with the first break being on lease expiry in February 2042. The property’s catchment area is situated within the Bartle Lane development area, which will see the development of up to 1,100 homes and associated infrastructure. This store fulfils both online home delivery and click and collect. The Group acquired the property in August 2019 for £54.4 million reflecting a net initial yield of 5.1%. PURCHASE PRICE: £54.4m PASSING RENT: £2.96m RENT REVIEW BASIS: Annual RPI uplift NEXT RENT REVIEW: March 2020 ACQUISITION DATE: August 2019 RENT REVIEW COLLAR: 4% cap, 1% floor LEASE EXPIRY: Feb 2042 SIZE NSA: 78,000 sq ft 1 0 S U P E R M A R K E T I N C O M E R E I T P LC Image: Our Sainsbury store, Preston STRATEGIC REPORT | INVESTMENT ADVISER’S REPORT CON TIN UED Tenant Location Tesco Tesco Sainsbury’s Tesco Tesco Morrisons Tesco Sainbury’s1 Thetford, Norwich Lime Trees, Ashford, Bristol Kent Cumbernauld, Doncaster Hillsborough, Mansfield, North Lanarkshire Scunthorpe Sheffield Road, Notts Preston, Lancashire Acquisition date Aug 2017 Aug 2017 Aug 2017 Dec 2017 May 2018 Jul 2018 Apr 2019 Aug 2019 Purchase price (millions) £43.2 £28.5 £79.8 £50.0 £53.0 £51.7 £45.0 £54.4 Valuation at 30 June 2019 (millions) £43.4 £29.6 £84.5 £55.1 £55.7 £53.0 £46.9 £54.4 Passing annual rent (millions) GIA (sq.ft.) NSA (sq.ft.) £2.64 78,000 48,000 £1.58 55,000 31,000 £3.93 £3.03 125,000 117,000 72,000 70,000 £2.98 98,000 65,000 £2.54 £2.51 £2.96 113,000 90,000 106,000 58,000 64,000 78,000 Rent review basis Annual RPI Annual RPI Annual RPI Annual RPI Annual RPI 5 yearly RPI Annual RPI Annual RPI Lease expiry Dec 2029 Mar 2031 Sep 2038 Aug 2040 Aug 2040 Oct 2039 Mar 2039 Feb 2042 Tenure Virtual freehold2 Virtual freehold2 Freehold Virtual freehold2 Virtual freehold2 Virtual freehold2 Virtual freehold2 Freehold 1 Asset acquired post balance sheet 2 Long leasehold i.e. greater than 900 years supply and demand characteristics in the investment market; and (iii) our ability to source off-market acquisitions for Supermarket Income REIT. With contracted rents increasing on average by 3.2% in the year and the high degree of certainty of income inherent in the Group’s long leases, the Investment Adviser believes further valuation growth will be achieved in the future. Financial results IFRS net rental income for the year was £17.2 million (13 months to 30 June 2018: £8.9 million). Contracted RPI rent reviews in the year resulted in average rental increases of 3.2% (13 months to 30 June 2018: 3.6%) with £2.9 million of IFRS rental growth contribution from new acquisitions. The strong rental growth reflects the contracted upward-only, RPI-linked rent reviews present in all of the Group’s leases. Administrative and other expenses, which include management and advisory fees and other costs of running the Group, were £3.1 million (13 months to 30 June 2018: £2.1 million) generating an EPRA cost ratio of 17.9% (13 months to 30 June 2018: 23.4%). Our EPRA cost ratio compares favourably with our peer group average of 20.2% and the reduction reflects a growing level of cost efficiency achievable as the Group continues to scale. Financing costs for the year were £4.2 million (13 months to 30 June 2018: £1.9 million) reflecting a weighted average finance cost of 2.5% (2018: 2.4%). The change in net financing costs in the year reflects the continued growth in the business. The Group’s conservative leverage policy continues to maintain a healthy level of interest cover at 487% compared to the covenant at a minimum of 200%. Further information on financing and hedging is provided below. As a result of the above, operating profit, before changes in the fair value of investment properties, as reported under IFRS, increased by 107% to £14.1 million (13 months to 30 June 2018: £6.8 million). Change in fair values of investment properties in the year was £0.6 million (13 months to 30 June 2018: £(4.1) million), which comprises £5.6 million acquisition costs offset via a £6.6 million increase in valuation and £(0.4) million rent smoothing adjustment. The Group’s EPRA NAV at 30 June 2019 equates to 97 pence per ordinary share (2018: 96 pence per ordinary share). A N N U A L R E P O R T 2 0 1 9 1 1 STRATEGIC REPORT | INVESTMENT ADVISER’S REPORT CON TIN UED The Group is a qualifying UK Real Estate Investment Trust (”REIT”) which exempts the Group’s property rental business from UK Corporation Tax. For the Period ending 30 June 2018, the Group was subject to corporation tax on its property rental business in the intervening period from incorporation on 1 June 2017 to the date of entry into the REIT regime on the 21 December 2017. During this period the Group was subject to UK corporation tax at an effective rate of 19%, resulting in a non-recurring £227,000 tax charge being recognised. The June 2018 UK corporation tax return was finalised in June 2019 and resulted in a £18,000 increase in the tax charge, being recognised in the current year, in relation to the pre-REIT regime period, due to non-deductible expenses of £94,000. Total shareholder return generated during the year was 8.0% (13 months to 30 June 2018: 8.0%). This is measured as the growth in share price over the year of 2.5p (13 months to 30 June 2018: 2.5%), plus dividends declared for the of 5.6% (13 months to 30 June 2018: 5.5%) divided by the share price at the beginning of the financial year. Financing and hedging The Investment Adviser has successfully broadened the Group’s debt funding relationships, adding Bayerische Landesbank in July 2018 and Deka Bank in August 2019 as lenders to the Group in addition to the Group’s £100 million revolving credit facility from HSBC. The Bayerische Landesbank credit facility has a credit margin of 125 basis points above three-month LIBOR and is secured against the Morrisons supermarket in Sheffield and the Sainsbury’s supermarket in Ashford. This new facility was fully hedged using an interest rate swap, thus fixing the Company’s cost of debt at 2.55% on this borrowing for the term of the facility. The Group has the following credit facilities: Total net debt as at 30 June 2019 is £144.8 million, reflecting a net loan-to-value (“LTV”) ratio of 36.3%. The Group’s medium-term target is an LTV ratio of 30%-40% once the portfolio growth phase is complete. Each loan drawn under the credit facilities requires interest payments only until maturity and is secured against both the subject property and the shares of the property-owning entity. Each property-owning entity is either directly or ultimately owned by the Company. The Group has negotiated significant headroom on its LTV covenants. The covenants contain a maximum 60% LTV threshold and a minimum 200% interest cover ratio for each asset in the Portfolio. As at 30 June 2019, the Group could afford to suffer a fall in property values of 34% before being in breach of its LTV covenants and, with the current hedging arrangements it has in place, it has significant interest cover headroom. The Group has designed its debt strategy to minimise the effect of a significant rise in underlying interest rates through the use of hedging instruments. The notional value of our interest rate cap was £63.5 million at 30 June 2019, meaning that we had effectively hedged more than 68% of our HSBC drawn facility. The strike of the interest rate cap is 1.75% which means that if three- month LIBOR rises above 1.75%, the Group’s cost of debt is effectively fixed at 3.35% on the hedged notional amount (including the lenders initial margin). The notional value of the interest rate swap is £52.1 million thus fixing the Company’s cost of debt on the BLB facility at 2.55% for the five year term of the facility. Our interest rate cap and interest rate swap run coterminous with the respective loan maturities. The total hedge ratio for the Group as at 30 June 2019 was 80% on drawn debt (2018: 71%). Lender HSBC Facility Revolving Credit Facility Bayerische Landesbank Term Loan Maturity Aug 2021 Jul 2023 Credit margin 1.60% 1.25% Loan commitment £m 100.0 52.1 Amount drawn at 30 June 2019 £m 92.8 52.1 Post balance sheet events Deka Bank Term loan Aug 2024 1.35% 47.6 47.6 1 2 S U P E R M A R K E T I N C O M E R E I T P LC Post balance sheet events On 28 August 2019, we completed the acquisition of our eighth supermarket asset, a Sainsbury’s superstore in Preston, Lancashire for £54.4 million (net of acquisition costs), reflecting a net initial yield of 5.1%. The Group has also arranged a new five-year, interest- only loan facility with Deka Bank. This £47.6 million facility has a fixed coupon of 1.9% and is secured against the Sainsbury’s superstore in Preston and the Tesco Extra supermarket in Mansfield, Nottingham. Atrato Capital Limited Investment Adviser 3 September 2019 Dividends The Company has declared four interim dividends for the year as follows: • On 8 October 2018, a first interim dividend of 1.375 pence per share, which was paid on 6 November 2018. • On 8 January 2018, a second interim dividend of 1.419 pence per share, which was paid on 8 February 2019. • On 8 April 2019, a third interim dividend of 1.419 pence per share, which was paid on 7 May 2019. • On 8 July 2019, a fourth interim dividend of 1.419 pence per share, which was paid on 7 August 2019. In line with its objective, the Company has declared an annualised dividend of 5.6 pence per Ordinary Share. The Group’s EPRA dividend cover ratio was 90% for the year (13 months to 30 June 2018: 92%). The Company intends to target an increase of 2.9% in the quarterly dividend from October 2019 to 1.46 pence per share (representing an increase equivalent to the published UK RPI inflation for the year).The first quarterly dividend of 1.46 pence per share is expected to be declared in January 2020 and paid in February 2020. As such the Company is targeting a dividend for the year to 30 June 2020 of 5.8 pence per share. Asset management Five rent reviews were concluded during the year. The combination of these inflation-linked rent reviews led to an increase in rental income of £0.4 million, equivalent to a 3.2% average annualised increase in the rents for these reviewed properties. All rent reviews on the Portfolio are upward only and linked to the UK Retail Price Index with a weighted average Portfolio cap of 4%. Further information on rent reviews can be found in the Supermarket property lease structure section on page 14. The Investment Adviser is engaged in detailed discussions with the operators of a number of the Company’s sites on asset management initiatives linked to the repurposing of space and investing in green energy efficiency schemes, such as roof top solar panelling. A N N U A L R E P O R T 2 0 1 9 1 3 STRATEGIC REPORT | OUR MARKET Supermarket real estate assets represent an attractive asset class for investors seeking long dated, secure, inflation-linked income with capital appreciation potential over the longer term. The UK grocery market UK consumer spending on grocery has grown year-on- year since 1999. According to forecasts by IGD Retail Analysis, total spending will continue to increase by a further 12.5% in the next five years from £194 billion in 2019 to £218 billion by 2024. Tesco, Asda, Sainsbury’s and Morrisons (the ‘‘Big Four’’) have a combined market share of approximately 68% and together operate more than 9,000 stores in the UK. Each of the Big Four has multi-billion-pound revenues, an established consumer brand and strong credit covenants. One of the many reasons that the Big Four have been able to protect their market dominance has been due to the nature of their underlying store portfolio. The Big Four benefitted from a first mover advantage and as a result are located in the best locations in each and every town across the UK. The grocery sales channels continue to evolve, however the larger stores remain the bedrock of the larger operators’ business models. According to IGD Retail Analysis research, supermarkets fulfil more than 60% of sales in the UK, followed by convenience stores at c.21%. This trend is not expected to change over the next five years. Discounters are expected to continue to grow with the discount channel representing approximately 16% of the total market by 2024. IGD UK grocery market forecast IGD UK channel forecasts 2019-2024 ) n b £ ( s e l a s y r e c o r G 220 215 210 205 200 195 190 185 180 14 12 10 8 6 4 2 0 ) % ( h t w o r g e v i t a l m u C 120 100 80 ) n b £ ( 60 40 20 0 109 106 Over 74% of total UK online grocery sales are fulfilled direct from supermarkets 48 41 34 25 17 12 10 9 2019 2020 2021 2022 2023 2024 Convenience Discount Online Grocery sales Cumlitave growth 2019 Value (£bn) 2024 Value (£bn) Although dominated by a few players, the grocery market is dynamic and highly competitive and has fragmented over the last 15 years, with lower-price operators (the ‘‘discounters’’), led by Aldi and Lidl, experiencing strong sales growth. The discounters continue to expand their presence by adding new stores and competing on price. This has resulted in them successfully gaining market share, though principally from the existing discounter channel rather than the Big Four. Supermarket property lease structure Supermarket lease agreements are often long dated and index-linked. Original lease tenures range from 20 to 30 years without break options. Rent reviews link the growth in rents to an inflation index such as RPI, RPIX or CPI (with caps and floors), or, alternatively, may have a fixed annual growth rate. Such rent reviews take place either annually or every five years, with the rent review delivering an increase in the rent at the growth rate, compounded over the period. 9.0 8.0 7.0 6.0 ) % ( d l e i y l a i t i n i t e N 1 4 S U P E R M A R K E T I N C O M E R E I T P LC 5.0 4.0 ) % ( d l e i y l a i t i n i t e N 9.0 8.0 7.0 6.0 5.0 4.0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2004 2013 2005 2014 2006 2015 2007 2016 2008 2017 2009 2018 2010 2019 2011 2012 2013 2014 2015 2016 2017 2018 2019 Supermarkets Distribution Warehouses UK Commercial Property Supermarkets Distribution Warehouses UK Commercial Property IPD net investment yields 2004-2019 (YTD) ) % ( d l e i y l a i t i n i t e N 9.0 8.0 7.0 6.0 5.0 4.0 IPD net investment yields 2004-2019 (YTD) 9.0 8.0 7.0 ) % ( d l e i y l a i t i n i 6.0 t e N 2008 2004 2005 2006 2007 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 5.2 4.7 4.6 Supermarkets Distribution Warehouses 5.0 UK All Property 4.0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Supermarkets Distribution Warehouses UK All Property Landlords often benefit from “full repairing and insuring leases”. These are lease agreements whereby the tenant is obligated to pay all taxes, building insurance, other outgoings and repair and maintenance costs on the property, in addition to the rent and service charge. Under such a lease, the tenant is responsible for all costs associated with the repair and maintenance of the building. Operators will typically have the option to acquire the leased property at the lease maturity date at market value. Furthermore, to ensure that the operator does not transfer its lease obligation to other parties, assignment of the lease is often prohibited. Investment yields Supermarket property has a long record of positive total returns underpinned by strong income returns due in part to the long length of lease commitments, upward- only rent review growth and strong occupier covenants. Investment yields on supermarket property have consistently been lower than UK all-property yields and reached a low of 4.3% in 2007. However, since 2013, the market dynamics have changed: in contrast to most other long-income property yields, the supermarket sector has experienced a negative yield shift with yields increasing by 20% from March 2007 to March 2019. Supermarket yields have now been trading at higher yields than UK all-property since 2015. Over the last five years the distribution warehouse subsector of the property market has seen a significant compression in yields. Distribution warehouses are fundamentally performing a different role to supermarkets in the supply chain. However, the Investment Adviser believes there are certain similarities in areas such as online sales, with supermarkets fulfilling online deliveries out of their larger omnichannel stores. Despite these similarities, there has been a significant difference in how the underlying property yields of the two sectors have performed. The grocery sector is now entering a period of increased stability. Competition remains high among operators, but multiple datapoints during 2018/19 suggest a more stable margin environment. In June Moody’s Investors Services upgraded Tesco plc back to investment grade following the actions of Fitch Ratings which raised them to the same level in late 2018 citing the operator’s improvements in cash generation, debt reduction and their anticipated growth in profits as the reasons behind the positive change. In addition, they believe that Tesco will cement its position as the dominant UK grocer and further deleverage its balance sheet. A N N U A L R E P O R T 2 0 1 9 1 5 STRATEGIC REPORT | OUR MARKET CONTINUED In this current climate, the Investment Adviser believes that secure, long-income supermarket property leases with index-linked rent can be acquired at attractive investment yields. Inflation protection The Investment Adviser believes that currently, real estate markets are undervaluing the inflation protection characteristics embedded in supermarket leases when compared to other comparable inflation-linked products, such as UK index-linked gilts. UK index-linked gilts have traded at negative real yields since 2013. Opportunities for asset management In addition to current rental yields, supermarket property has further potential for asset management upside opportunities to enhance total shareholder returns. These multiple asset management opportunities can be categorised into two distinct segments: Light asset management Light asset management typically involves small-scale changes and improvements to a building which require limited additional capital and/or planning approvals. Examples include investing in green energy efficiency schemes, such as energy efficient lighting, solar panelling, battery capture and storage and combined heat and power. These types of schemes may provide incremental additional returns for investors on a risk-adjusted basis, but, importantly, can also assist the underlying operator in meeting certain strategic objectives in areas such as sustainability targets. Repurposing space The repurposing of space allows operators to maximise the value of their building and potentially increase underlying footfall or revenues per square foot by adding new customer offerings or facilities in or around the store. Repurposing space typically requires an increased level of interaction with the operator and an element of planning approval. However, the primary use of the majority of the asset is not expected to change. Examples include adding restaurants, cafes and drive- through facilities on excess car parking or adapting some of the existing store for alternative use such as click-and- collect facilities. The Company will engage and work closely with its tenants on all available asset management opportunities with a view to enhancing long-term shareholder returns. Supply and demand After a period of material expansion in store numbers since 2000, the Big Four have substantially completed their store growth plans and are now in a consolidation phase. Few new large properties are being developed by the operators and the strategic focus has generally shifted from creating new assets to increasing efficiencies on the supply side, meeting customer concerns with an improved shopping experience and further diversification in brands, merchandise and sales channels. 1 6 S U P E R M A R K E T I N C O M E R E I T P LC 5 Property Data 2019. Includes securitisation buy backs The effect of this shift in strategic focus has been an end to sale-and-leaseback transactions involving the Big Four and, therefore, there has been a decline in the number of assets being offered to the investment market. Indeed, in a reversal of recent trends, Tesco has now become a net buyer of stores, spending around £1.2 billion5 on store buybacks since 2015 to date. The Investment Adviser believes that operator buybacks will continue to be a key theme in the investment market, as changes to accounting rules through IFRS 16 mean that reducing existing lease commitments will be an increasingly attractive way for the operators to strengthen their underlying balance sheet. IFRS 16 effectively requires all rental obligations to be capitalised on a balance sheet as a financing liability and then expensed as a finance cost rather than rental expense in the income statement. Demand for supermarket assets has been consistently strong. According to Colliers International, both 2018 and 2019 each saw more than £1 billion of secondary market transactions take place with institutional investment activity up 29% in 2019. Other than the transactions carried out by the Company, the majority of this activity arose from operators seeking to buy back stores and overseas investors who appear to have taken advantage of the decline in sterling exchange rates and attractive asset pricing. The Investment Adviser believes that the reduced supply of new stock from operators combined with a growing demand for supermarket assets will generate favourable supply and demand dynamics and therefore trigger a long-term compression in yields closer to those for the UK commercial property, with a corresponding increase in supermarket property asset values. A N N U A L R E P O R T 2 0 1 9 1 7 STRATEGIC REPORT | IMPLEMENTING THE GROUP’S INVESTMENT POLICY “ Supermarket property is an attractive asset class for investors seeking secure, inflation-linked income” Steven Noble Atrato Capital The supermarket property sector remains highly attractive and we continue to demonstrate our ability to source attractively priced, high-quality supermarket property. Investing in the future model of UK grocery A cornerstone of our investment strategy is to target future-proofed supermarkets known as omnichannel supermarkets. These supermarkets operate as both physical stores and online fulfilment centres. In the 22 years since Tesco introduced the UK’s first nationwide online grocery platform in 1997, UK grocers have pioneered the development of this omnichannel business model which seamlessly integrates both in-store and online demand across the UK. These omnichannel properties have become the nucleus for last-mile grocery fulfilment, representing the crucial infrastructure that is integrating online and traditional in-store sales, with characteristics not evident in other forms of real estate, namely: • modern flexible buildings adapted to operate both in-store and online operations, accommodating multiple loading bays, refrigeration units and home delivery vehicles • situated in population centres close to consumers • strategically located close to major road networks, allowing efficient goods inward stocking, distribution of home deliveries and convenient access to click and collect facilities • large floor areas, capable of housing a full range of fresh groceries and providing scale economies for the operator The success of the omnichannel grocery model has resulted in pure-play online retailers adopting the omnichannel format. Examples of this trend are Amazon’s purchase of Whole Foods in the US and Alibaba’s Hema omnichannel grocery store network in China. Online-only grocery warehouses (known as “dark stores” or “Customer Fulfilment Centres”) will continue to play an important role in optimising online fulfilment in very high population density cities, such as London. However, away from megacities there is now a global convergence on the future model of grocery being an omnichannel store. As a result, both pure-play online and traditional bricks-and-mortar retailers are increasingly relying on supermarket real estate, generating significant scope for rental and valuation growth in the longer term. Optimising portfolio value Our deep understanding of where and how each of our grocery stores fits both within the national store network and the micro catchment area is key to our investment decision. A good example of this is our Tesco Store in Thetford, acquired in 2017, which had significant potential given local housing shortages and nearby planning consent to build 5,000 homes and associated infrastructure. We are delighted to see the first phase being completed directly adjacent to the store, which ultimately repositions this Tesco store in the centre of the significantly enlarged town, enhancing the regear potential of the supermarket and the long-term value of the underlying real estate. Capitalising on the depth of our relationship with occupiers is a key part of our overall strategy. Our regular programme of operator engagement at all levels of the organisation allows us to identify opportunities to enhance our sites and generate additional income to increase capital values. An example of this is providing environmentally sustainable supermarkets to support carbon reduction efforts, better returns for investors and lower running costs for occupiers. 1 8 S U P E R M A R K E T I N C O M E R E I T P LC During the year, we have performed extensive due diligence on the opportunity to install on-site decarbonised energy producing plant across our estate. To date we have commenced District Network Operator (DNO) applications for the installation of extensive rooftop photovoltaic panels covering more than 70% of the total GIA of our estate. Through green energy investment, we not only generate an income producing asset but also reduce costs for our tenants while also assisting their transition to a lower carbon emission future. A good example of this is our Tesco store in Scunthorpe, where we have received approval from the DNO for the installation of a 190 kwp solar array which can supply power direct to the store. This investment will enhance the environmental sustainability of the site whilst also generating additional income stream for Supermarket Income REIT, enhancing the long-term capital value of the site. We continue to explore the repurposing of space that allows operators to maximise the value of their building and, potentially, increase underlying footfall or revenues per square foot by adding new customer offerings or facilities in or around the store. Repurposing space typically requires an increased level of interaction with the operator and an element of planning approval. However, the primary use of the majority of the asset is not expected to change. Examples include adding restaurants, cafes and drive-through facilities on excess car parking or adapting some of the existing store for alternative use such as click-and-collect facilities. A N N U A L R E P O R T 2 0 1 9 1 9 STRATEGIC REPORT | OUR PRINCIPAL RISKS The Board of the Company and JTC Global AIFM Solutions Limited, the Company’s Alternative Investment Fund Manager (the “AIFM”), together have joint overall responsibility for the Company’s risk management and internal controls, with the Audit Committee reviewing the effectiveness of the Board’s risk management processes on its behalf. surrounding anticipated outcomes, balanced against the objective of creating value for shareholders. There are a number of potential risks and uncertainties which could have a material impact on the Group’s performance over the forthcoming financial year and could cause actual results to differ materially from expected and historical results. We aim to operate in a low-risk environment, focusing on a single sector of the UK real estate market. The Board and the AIFM therefore recognise that effective risk management is key to the Group’s success. Risk management ensures a defined approach to decision making that seeks to decrease the uncertainty The matrix below illustrates our assessment of the impact and the probability of the principal risks identified. The rationale for the perceived increases and decreases in the risks identified is contained in the commentary for each risk category. h g H i w o L i m u d e M e r a R t c a p m I 3 1 8 6 2 4 7 9 5 11 10 Rare Probability Low Medium High The Board considers these risks have increased since last year 8 We are reliant on the continuance of the Investment Adviser The Board considers all the other risks to be broadly unchanged since last year 1 The lower-than-expected performance of the Portfolio could reduce property valuations and/or revenue, thereby affecting our ability to pay dividends or lead to a breach of our banking covenants 2 Our ability to source assets may be affected by competition for investment properties in the supermarket sector 4 Our use of floating rate debt will expose the business to underlying interest rate movements 6 We must be able to operate within our banking covenants 7 There can be no guarantee that we will achieve our investment objectives 10 European Union exit without EU trade deal (“Brexit”) 11 Shareholders may not be able to realise their shares at a price above or the same as they paid for the shares or at all The Board considers these risks have decreased since last year 3 The default of one or more of our lessees would reduce revenue and may affect our ability to pay dividends 5 A lack of debt funding at appropriate rates may restrict our ability to grow 9 We operate as a UK REIT and have a tax-efficient corporate structure, with advantageous consequences for UK shareholders 2 0 S U P E R M A R K E T I N C O M E R E I T P LC PROPERTY RISK 1 The lower-than-expected performance of the Portfolio could reduce property valuations and/or revenue, thereby affecting our ability to pay dividends or lead to a breach of our banking covenants Probability: Low Impact: Moderate Mitigation An adverse change in our property valuations may lead to breach of our banking covenants. Market conditions may also reduce the revenues we earn from our property assets, which may affect our ability to pay dividends to shareholders. A severe fall in values may result in us selling assets to repay our loan commitments, resulting in a fall in our net asset value. Our property portfolio is 100% let with long weighted average unexpired lease terms and an institutional-grade tenant base. All the leases contain upward-only rent reviews which are inflation linked. These factors help maintain our asset values. We manage our activities to operate within our banking covenants and constantly monitor our covenant headroom on loan to value and interest cover. 2 Our ability to source assets may be affected by competition for investment properties in the supermarket sector Probability: Low Impact: Moderate Mitigation The Company faces competition from other property investors. Competitors may have greater financial resources than the Company and a greater ability to borrow funds to acquire properties. The Investment Adviser has extensive contacts in the sector and we often benefit from off-market transactions. They also maintain close relationships with a number of investors and agents in the sector, giving us the best possible opportunity to secure future acquisitions for the Group. We are not exclusively reliant on acquisitions to grow the portfolio. Our leases contain upward-only rent review clauses, which mean we can generate additional income and value from the current portfolio. We also have the potential to add value through asset management and we are actively exploring opportunities for all our sites. 3 The default of one or more of our lessees would reduce revenue and may affect our ability to pay dividends Probability: Low Impact: High Mitigation Our focus on supermarket property means we directly rely on the performance of UK supermarket operators. Insolvencies could affect our revenues earned and property valuations. Our investment policy requires the Group to derive at least 60% of its rental income from a portfolio let to the largest four supermarket operators in the UK by market share. Focusing our investments on assets let to tenants with strong financial covenants and limiting exposure to smaller operators in the sector decreases the probability of a tenant default. Before investing, we undertake a thorough due diligence process with emphasis on the strength of the underlying covenant and receive a recommendation on any proposed investment from the AIFM. All our leases are either guaranteed by the parent company in the operator group or are a direct obligation of the main UK operating entity of the operator group. We select assets that have strong property fundamentals (good location, large sites with low site cover) and which should be attractive to other occupiers or have strong alternative use value should the current occupier fail. A N N U A L R E P O R T 2 0 1 9 2 1 STRATEGIC REPORT | OUR PRINCIPAL RISKS CON TIN UED FINANCIAL RISK 4 Our use of floating rate debt will expose the business to underlying interest rate movements Probability: Low Impact: Low Mitigation Interest on the majority of our debt facilities is payable based on a margin over LIBOR. Any adverse movements in LIBOR could significantly impair our profitability and ability to pay dividends to shareholders. We have entered into interest rate derivative contracts to partially mitigate our direct exposure to movements in LIBOR, by capping our exposure to LIBOR increases. We aim to prudently hedge our LIBOR exposure, by utilising hedging instruments with a view to keeping the overall exposure at an acceptable level. 5 A lack of debt funding at appropriate rates may restrict our ability to grow Probability: Low Impact: Low Mitigation Without sufficient debt funding we may be unable to pursue suitable investment opportunities in line with our investment objectives. If we cannot source debt funding at appropriate rates, this will impair our ability to maintain our targeted level of dividend. Before we contractually commit to buying an asset, we enter discussions with our lenders to get outline heads of terms on debt financing, which ensures that we can borrow against the asset and maintain our borrowing policy. The Board keeps our liquidity and gearing levels under review. We have recently broadened our lender base, entering banking facilities with a new lender. This has created new banking relationships for us with the aim of keeping lending terms as competitive as possible. Supermarket property should remain popular with lenders, owing to long leases and letting to single tenants with strong financial covenants 6 We must be able to operate within our banking covenants Probability: Low Impact: Moderate Mitigation If we were unable to operate within our banking covenants, this could lead to default and our bank funding being recalled. We and the AIFM continually monitor our banking covenant compliance to ensure we have sufficient headroom and to give us early warning of any issues that may arise. We will enter into interest rate caps and swaps to mitigate the risk of interest rate rises and also invest in assets let to institutional grade covenants. 7 There can be no guarantee that we will achieve our investment objectives Probability: Low Impact: Low Mitigation Our investment objectives include achieving the dividend and total returns targets. The amount of any dividends paid or total return we achieve will depend, among other things, on successfully pursuing our investment policy and the performance of our assets. Future dividends are subject to the Board’s discretion and will depend, on our earnings, financial position, cash requirements, level and rate of borrowings, and available profit. At 30 June 2019, we had acquired seven supermarket assets that meet our investment criteria. The Investment Adviser’s significant experience in the sector should continue to provide us with access to assets that meet our investment criteria going forward as evidenced by the acquisition of an eighth asset after the balance sheet date. Rental income from our current portfolio, coupled with our hedging policy, supports the current 5.8 pence per share dividend target. Movement in capital value is subject to market yield movements and the ability of the Investment Adviser to execute asset management strategies. 2 2 S U P E R M A R K E T I N C O M E R E I T P LC 8 We are reliant on the continuance of the Investment Adviser Probability: Low Impact: Moderate Mitigation We rely on the Investment Adviser’s services and reputation to execute our investment strategy. Our performance will depend to some extent on the Investment Adviser’s ability and the retention of its key staff. Unless there is a default, either party may terminate the Investment Advisory Agreement by giving not less than 12 months’ written notice, which may not be given before the fifth anniversary of the IPO. The Board regularly reviews and monitors the performance of the Investment Adviser. The interests of the Company and the Investment Adviser are aligned due to (a) key staff of the Investment Adviser having significant personal equity investments in the Company and (b) any fees paid to the Investment Adviser in shares of the Company are to be held for a minimum period of 12 months. The Board can pay up to 25% of the Investment Adviser fee in shares of the Company. In addition, the Board meets regularly with the Investment Adviser to ensure we maintain a positive working relationship and the AIFM receives and reviews regular reporting from the Investment Adviser and reports to the Company’s Board on the Investment Adviser’s performance. The AIFM also reviews and makes recommendation to the Company’s Board on any investments or significant asset management initiatives proposed by the Investment Adviser. TAXATION RISK 9 We operate as a UK REIT and have a tax-efficient corporate structure, with advantageous consequences for UK shareholders. Any change to our tax status or in UK tax legislation could affect our ability to achieve our investment objectives and provide favourable returns to shareholders Probability: Low Impact: Moderate Mitigation If the Company fails to remain a REIT for UK tax purposes, our profits and gains will be subject to UK corporation tax. The Board takes direct responsibility for ensuring we adhere to the UK REIT regime by monitoring the REIT compliance. The Board has also engaged third-party tax advisers to help monitor REIT compliance requirements and the AIFM also monitors compliance by the Company with the REIT regime. POLITICAL RISK 10 European Union exit without EU trade deal (“Brexit”) Probability: High Impact: Low Mitigation The Group operates with a focus on the UK supermarket sector. It is currently well positioned with long term secure leases to institutional- grade tenants with strong balance sheets and well placed to withstand any downturn in the UK economy. The vote in June 2016 to leave the European Union has resulted in political and economic uncertainty that could have a negative effect on the performance of the Group. Until the terms of the settlement with the European Union become clearer the exact outcome on the business is difficult to predict at this stage. A N N U A L R E P O R T 2 0 1 9 2 3 STRATEGIC REPORT | OUR PRINCIPAL RISKS CON TIN UED MARKET PRICE RISK 11 Shareholders may not be able to realise their shares at a price above or the same as they paid for the shares or at all Probability: Moderate Impact: Moderate Mitigation Although the Company’s Ordinary Shares have to date traded in a relatively narrow range closely related to the price at which they were issued, this is largely a function of supply and demand for the Ordinary Shares in the market and cannot therefore be controlled by the Board. Shareholders who wish to sell their Ordinary Shares may be obliged to sell their Ordinary Shares at a significant discount or may not be able to sell them at all. The Company may seek to address any significant discount to NAV at which its Ordinary Shares may be trading by purchasing its own Ordinary Shares in the market on an ad hoc basis. The Directors have the authority to make market purchases of up to 14.99 per cent of the Ordinary Shares in issue as at IPO. Ordinary Shares will be repurchased only at prices below the prevailing NAV per Ordinary Share, which should have the effect of increasing the NAV per Ordinary Share for remaining shareholders. It is intended that a renewal of the authority to make market purchases will be sought from shareholders at each annual general meeting of the Company. Purchases of Ordinary Shares will be made within guidelines established from time to time by the Board. Investors should note that the repurchase of Ordinary Shares is entirely at the discretion of the Board and no expectation or reliance should be placed on such discretion being exercised on any one or more occasions or as to the proportion of Ordinary Shares that may be repurchased. Risk Assumption Tenant risk Tenants (or guarantors where relevant) continue to comply with their rental obligations over the term of their leases and do not suffer any insolvency events over the term of the review. Borrowing risk The Group continues to comply with all relevant loan covenants. The Group is able to refinance the £100.0 million RCF falling due in August 2021 and the £52.1 million Term Loan falling due in July 2023 on acceptable terms. Liquidity risk The Group continues to generate sufficient cash to cover its costs while retaining the ability to make distributions. Going concern The Board regularly monitors the Group’s ability to continue as a going concern. Included in the information reviewed at quarterly Board meetings are summaries of the Group’s liquidity position, compliance with loan covenants and the financial strength of its tenants. Based on this information, the Directors are satisfied that the Group and Company are able to continue in business for the foreseeable future and therefore have adopted the going concern basis in the preparation of this financial statement. Viability statement The Board has assessed the prospects of the Group over the five years from the balance sheet date to 30 June 2024, which is the period covered by the Group’s longer term financial projections. The board considers five years to be an appropriate forecast period since, although the Group’s contractual income extends beyond five years, the availability of finance and market uncertainty reduces the overall reliability of forecast performance over a longer period. The Board considers the resilience of projected liquidity, as well as compliance with secured debt covenants and UK REIT rules, under a range of RPI and property valuation assumptions. The principal risks and the key assumptions that were relevant to this assessment are as follows: 2 4 S U P E R M A R K E T I N C O M E R E I T P LC Based on the work performed, the Board has a reasonable expectation that the Group will be able to continue in business over the five year period of its assessment. Other disclosures Disclosure in relation to the Company’s business model and strategy have been included within the Investment Adviser’s report on pages 9 to 13. Disclosures in relation to the main industry trends and factors that are likely to affect the future performance and position of the business have been included within Our Market on pages 14 to 17. Disclosures in relation to environmental and social issues have been included within Corporate Social Responsibility on page 32. Employee diversity have not been included as the Directors’ do not consider these to be relevant to the Company. Key Performance Indicators (KPIs) The KPIs used by the Group in assessing its strategic progress have been included within the Chairman’s Statement on pages 2 to 3, the Investment Adviser’s report on pages 9 to 13 and the supplementary information on pages 79 to 82. The Strategic Report, which comprises the Chairman’s Statement, Achievements in Brief, Our Portfolio, Investment Adviser’s Report, Our Market and Our Principal Risks section in the Annual Report was signed on behalf of the Board on 3 September 2019. Nick Hewson Chairman 3 September 2019 A N N U A L R E P O R T 2 0 1 9 2 5 CORPORATE GOVERNANCE | BOARD OF DIRECTORS DIRECTORS NICK HEWSON CHAIRMAN Nick Hewson was co-founder, CEO and chairman of Grantchester Holdings plc, where he worked from 1990 until 2002. Nick currently serves as a non-executive director and chair of the audit committee at Redrow plc, a FTSE 250 company and one of the UK’s leading housebuilders. Prior to this, Nick was chair of the executive committee of Pradera AM plc, a European retail property fund management business. Nick was also a founding partner of City Centre Partners LP. VINCE PRIOR SENIOR INDEPENDENT DIRECTOR Vince Prior joined Sainsbury’s Property Investment team in 2008 and was subsequently appointed as Head of Property Investment. Over a five-year period to 2014, the value of Sainsbury’s property portfolio grew from £7.5 billion to £12 billion. Before joining Sainsbury’s Vince was the head of Retail Advisory Services at Jones Lang LaSalle (“JLL”) and provided strategic advice to a range of high-profile supermarket and retail operators. Vince started his career working for Tesco where he helped to set up their store location team. JON AUSTEN CHAIR OF AUDIT COMMITTEE Jon Austen is chief financial officer at Audley Court Limited, which develops retirement villages in the UK. Jon is also a non-executive director of McKay Securities plc, which specialises in office and industrial property. Prior to Audley Court, Jon was group finance director at Urban&Civic Plc. Jon has also held senior finance roles at London and Edinburgh Trust plc, Pricoa Property plc and Goodman Limited. Jon is a fellow of the Institute of Chartered Accountants of England and Wales. 2 6 S U P E R M A R K E T I N C O M E R E I T P LC INVESTMENT ADVISER BEN GREEN Ben has over 20 years of experience structuring and executing real estate transactions and has completed £4 billion of supermarket sale and leasebacks over the course of his career. Ben qualified as a lawyer in 1997 and worked at Wilde Sapte and Linklaters LLP. He left law in 2000 and has since spent his career at Barclays, Lloyds and Goldman Sachs where he was a Managing Director and European Head of Structured Finance. STEVE WINDSOR Steve spent 16 years at Goldman Sachs specialising in finance and risk management. Steve became a partner at Goldman Sachs in 2008 and headed Goldman Sachs’ European, Middle East and African Debt Capital Markets and Risk Management businesses from 2010 until 2016. Steve has helped and advised a number of FTSE 100 companies on how to finance their business and manage risk. Steve was a member of the Goldman Sachs Investment Banking Risk Committee. STEVEN NOBLE Steven spent nine years at Lloyds in origination and risk management with focus on commercial real estate. Steven has negotiated and executed over £500 million of supermarket property transactions. Prior to Lloyds, Steven was at KPMG where he qualified as a chartered accountant. Steven is a fellow of the Institute of Chartered Accountants Ireland and holds the Chartered Financial Analyst designation. CHRISTOPHER FEARON Christopher provides research analysis on potential acquisitions and asset management initiatives. Christopher has several years’ experience working for multi-sector asset managers and holds an MSc in Real Estate from CASS Business School. SANDEEP PATEL Sandeep is a fellow of the Association of Certified Chartered Accountants. He trained at Ernst & Young, following which he spent 10 years at Lloyds Banking Group in a variety of senior Accounting & Finance positions. NATALIE MARKHAM Natalie was previously chief financial officer at Macquarie Global Property Advisors Europe. Natalie was also amember of the MGPA European management team and a director of the MGPA European advisory business. Natalie was involved in the development of business strategy, financial planning and responsible for all aspects of the financial management of the business. Natalie qualified as a chartered accountant in 2000 and is a fellow of the Institute of Chartered Accountants of England and Wales. A N N U A L R E P O R T 2 0 1 9 2 7 CORPORATE GOVERNANCE | CORPORATE GOVERNANCE STATEMENT The Board has considered the principles and recommendations of the AIC Code of Corporate Governance (‘AIC Code’) by reference to the AIC Corporate Governance Guide (“AIC Guide”). The AIC Code as explained by the AIC Guide, addresses all the principles set out in the UK Corporate Governance Code (the “UK Code”), as well as setting out additional principles and recommendations on issues that are of specific relevance to the Company. The Board considers that reporting against the principles and recommendations of the AIC Code, and by reference to the AIC Guide, (which incorporated the UK Code), will provide better information to shareholders. The Company has complied with the recommendations of the AIC Code and the relevant provisions of the UK Code as set out below. Code principles and provisions, as well as the new requirements simultaneously introduced by The Companies (Miscellaneous Reporting) Regulations 2018, the Board will review the Company’s governance arrangements during the year ending 30 June 2020 and will report against the new AIC Code in its next Annual Report. This will include an explanation of how stakeholder interests and the matters set out under section 172 of the Companies Act 2006 are considered in Board discussions and decision-making. The Board recognises that, in light of the recent developments to the corporate governance landscape, some changes to its current governance practices may be necessary. The Company is committed to maintaining the highest standards of governance and during the year ending June 2020 it will work to ensure that it continues to meet all applicable requirements. The UK Corporate Governance Code includes provisions relating to: • the role of the Chief Executive • Executive Directors’ renumeration; and • the need for an internal audit function. For the reasons set out in the AIC Guide, and as explained in the UK Code, the Board considers these provisions are not relevant to Supermarket Income REIT plc, being an externally managed investment company. All of the Company’s day-to-day management and administrative functions are outsourced to third parties. As a result, the Company has no executive directors, employees or internal operations. The Company has therefore not reported further in respect of these provisions. A copy of the AIC Code and the AIC Guide can be obtained via the AIC’s website, www.theaic.co.uk. In February 2019 the AIC published the revised AIC Code to reflect the changes that had been introduced by the new 2018 edition of the UK Corporate Governance Code in so far as they are appropriate to an investment company. The new Code applies to financial periods beginning on and after 1 January 2019. In light of the updated AIC This Corporate Governance Statement forms part of the Directors’ Report. The Company’s compliance with, or reasons for departure from, the principles of the AIC Code are set out in the table below. Throughout the period, the Company has also complied with the following provisions of the UK Code: A.4.1 The Board should appoint one of the independent non executive directors to be senior independent director. The Board took the decision on 7 February 2018 to appoint Vince Prior as the Senior Independent Director. B.2.4 (DTR 7.2.8AR) Provide a description of the Board’s policy on diversity, including gender, any measurable objectives that this has set for implementing the policy, and progress on achieving the objectives and Diversity Policy. The Board adopted a formal diversity policy at its meeting on 3 September 2018, reflecting wider diversity characteristics of gender, ethnicity, age, disability, social or educational background. Previously, the Board’s approach was to appoint the best possible candidate, considered on merit and against objective criteria. AIC Code Principle Evidence of compliance/explanation of departure from the AIC Code 1 2 The Chairman should be independent. A majority of the board should be independent of the manager and of the Investment Adviser. The Chairman, Nick Hewson, was independent on appointment. During the period under review the Board consisted solely of Non-Executive Directors with Nick Hewson as Chairman. All of the Directors are considered by the Board to be independent of the Alternative Investment Fund Manager (the ‘AIFM’ or ‘Investment Manager’) and of Atrato Capital Limited (the ‘Investment Adviser’). As such they are considered to be free from any business or other relationships that could interfere with the exercise of their judgements. 2 8 S U P E R M A R K E T I N C O M E R E I T P LC AIC Code Principle Evidence of compliance/explanation of departure from the AIC Code 3 4 5 6 7 8 Directors should be submitted for re-election at regular intervals. Nomination for re-election should not be assumed but be based on disclosed procedures and continued satisfactory performance. The Board should have a policy on tenure, which is disclosed in the annual report. There should be full disclosure of information about the Board The Board should aim to have a balance of skills, experience, length of service and knowledge of the company. The Board should undertake a formal and rigorous annual evaluation of its own performance and that of its committees and individual directors. Director remuneration should reflect their duties, responsibilities and the value of their time spent. All Directors retire at each Annual General Meeting and those eligible and wishing to serve again offer themselves for election. Each of Nick Hewson, Vince Prior and Jon Austen were appointed as directors of the Company on 5 June 2017. Brief biographical details on Nick Hewson, Vince Prior and Jon Austen may be found in the section of the Annual Report and Accounts on the Board of Directors. The Board’s policy on tenure is that continuity and experience are considered to add significantly to the strength of the Board and, as such, there is no limit on the overall length of service of any of the Directors. The Board does not believe that length of service on a wholly non-executive Board has a bearing on independence. An individual Director’s experience and continuity of Board membership can significantly enhance the effectiveness of the Board as a whole. In line with the recommendation of the 2019 AIC Code, a policy on chair tenure will be considered by the Board in during the year ending 30 June 2020. Full information about the Board is set out in the Directors’ biographies on the Company website at http://supermarketincomereit.com All new appointments by the Board are subject to election by shareholders at the AGM following their appointment. The Board believes in the benefits of having a diverse range of skills and backgrounds, and the need to have a balance of experience, independence, diversity, including gender, and knowledge on its Board of Directors. The Board has a formal policy to evaluate its own performance annually. The Chairman leads the assessment which covers: • The performance of the Board and its committees, including how the Directors work together as a whole; • The balance of skills, experience, independence and knowledge of the Directors; and • Individual performance, particularly considering whether each Director continues to make an effective contribution. The assessment involves the completion of anonymous questionnaires followed by a discussion with all Directors, as a group and individually. Following the completion of the first years’ evaluation process, the Chairman held one to one discussions with the Board members to consider the feedback on the performance of the individuals and the Senior Independent Director, Vince Prior, led the discussion on the performance of the Chairman. The results of the evaluation process were presented to and discussed by the Board and it was concluded that the Board was functioning effectively. One of the actions arising from the 2018 evaluation is to address the diversity of the Board, which is being addressed with discussions around hiring a fourth Director. A similar evaluation will be undertaken during the next financial year. The Group does not have a separate remuneration committee as the Board fulfils the function of a remuneration committee. Directors’ remuneration levels are set by the Board by reference to market rates for equivalent positions in REITs of similar size and / or mandate. The remuneration of the Directors is determined within the limits set out in the Remuneration policy and the total aggregate annual fees payable to the Directors in respect of any financial period shall not exceed £500,000. Any fees in excess of this amount must be approved by shareholders by way of an Ordinary Resolution. A N N U A L R E P O R T 2 0 1 9 2 9 CORPORATE GOVERNANCE | CORPORATE GOVERNANCE STATEMENT CONTINUED AIC Code Principle Evidence of compliance/explanation of departure from the AIC Code 9 10 11 12 13 14 15 The independent directors should take the lead in the appointment of new directors and the process should be disclosed in the annual report. Directors should be offered relevant training and induction. The Chairman (and the Board) should be brought into the process of structuring a new launch at an early stage. The Board, which consists solely of independent non-executive Directors, is responsible for identifying and recommending the appointment of new Directors. The Board does not use a separate nomination committee given the size and nature of the Board¬. Following the annual evaluation process during which the Board considers its own performance and that of any committees and individual directors, the Board led by the Chairman assesses whether any skill gaps exist which would require the appointment of a new Board member. The Board also considers: • the time spent by each Director, during the period, on matters relating to the Company, having due regard to the other commitments each Director has outside his or her involvement with the Company; • whether each Director has demonstrated sufficient commitment to discharging his or her duties as a Director for the Company and has committed sufficient time to Company matters; • whether the performance of each Director submitting themselves for re-election continues to be effective, and • that each Director has demonstrated commitment to the role. New Directors will receive an induction from the Investment Manager and the Administrator on joining the Board. Directors receive market updates and regulatory developments and are provided training as identified through the Board evaluation, as required. This principle applies to the launch of new investment companies and is therefore not applicable to the Company. Whenever the Company is planning an equity fundraising, the Chairman and the Board will be involved and are integral to the process from an early stage. Boards and managers should operate in a supportive, co-operative and open environment. Formal Board meetings provide a forum for the Directors to receive reports and interact with key members of the Investment Manager’s team. However, there is ongoing informal interaction between the Directors and the Manager through the provision of investment updates and other queries that the Board may have. The Board meets regularly and receives full information on the Group’s investment performance, assets, liabilities, proposed investments and other relevant information in advance of Board meetings. The primary focus at regular board meetings should be a review of investment performance and associated matters such as gearing, asset allocation, marketing/ investor relations, peer group information and industry issues. Boards should give sufficient attention to overall strategy. Strategic issues and operational matters of a material nature are determined and monitored on any on-going basis by the Board. Where required Board meetings are convened to discuss strategy. The Board should regularly review both the performance of, and contractual arrangements with, the manager (or executives of a self- managed company). JTC Global AIFM Solutions Limited has been appointed by the Group, pursuant to the AIFM Agreement, to be the Group’s Alternative Investment Fund Manager (the ‘AIFM’ or ‘Investment Manager’), under which it is responsible for overall portfolio management and compliance with the Group’s investment policy, ensuring compliance with the requirements of the Alternative Investment Fund Managers Directive (‘AIFMD’) that apply to the Group, and undertaking risk management. The AIFM has delegated certain services in relation to the Group and its Portfolio to Atrato Capital Limited (‘Atrato’ or the ‘Investment Adviser’). Atrato advises the Group and the AIFM on the acquisition and financing of its Portfolio and on the development, management and disposal of UK commercial assets in its Portfolio pursuant to the Investment Advisory Agreement. The Board keeps the appropriateness of the Investment Adviser’s appointment under review. In doing so the Board considers the past investment performance of the Group and the capability and resources of the Investment Adviser to deliver satisfactory investment performance in the future. It also reviews the fees payable to the Investment Adviser, together with the standard of the other services provided. 3 0 S U P E R M A R K E T I N C O M E R E I T P LC AIC Code Principle Evidence of compliance/explanation of departure from the AIC Code 16 17 18 19 20 21 The Board should agree policies with the manager covering key operational issues. The management agreement between the Group and the Investment Manager sets out the matters over which the Investment Manager has authority and the limits beyond which Board approval must be sought. All other matters, including investment and dividend policies, corporate strategy, gearing and, corporate governance procedures and risk management, are reserved for the approval of the Board of Directors. Boards should monitor the level of the share price discount or premium (if any) and, if desirable, take action to reduce it. The Board monitors the share price on an ongoing basis. The Board has not attempted to manage any discount through a repurchase of shares as Directors believe that the discount is minimised through consistently good long term returns, transparent reporting, rigorous valuation, avoidance of risk at the Company level and the maintenance of an active programme of market engagement. The Board should monitor and evaluate other service providers. The Board should regularly monitor the shareholder profile of the Group and put in place a system for canvassing shareholder views and for communicating the Board’s views to shareholders. The Board should normally take responsibility for, and have a direct involvement in, the content of communications regarding major corporate issues even if the manager is asked to act as spokesman. All third party service providers are monitored on an on-going basis by reference to the quality of work produced. A rolling programme has been set up to review and monitor compliance of third party providers against the terms of their agreements. The nature and depth of each review is based upon the risk and materiality of each provider. The performance of the other service providers is assessed on a regular basis by the Board. The Board concluded that for the year ended 30 June 2019 the performance of all third party service providers was considered satisfactory and there were no material concerns to address. The Board seeks the views of its shareholders and places great importance on communication with them. The Board receives regular reports, from the Investment Adviser and from the Corporate Broker, on the views of shareholders, and the Chairman and other Directors make themselves available to meet shareholders, when required, to discuss any significant issues that have arisen and address shareholder concerns and queries. The AGM provides the Board with an important opportunity to make contact with shareholders, who are invited to meet the Board following the formal business of the meeting. The Board has responsibility for approving the content and timing of communications regarding major corporate issues and events. Communications normally take the form of stock exchange R.I.S. announcements, press releases and direct correspondence with shareholders. The Board seeks the views of its shareholders and places great importance on communication with them. The Board should ensure that shareholders are provided with sufficient information for them to understand the risk:reward balance to which they are exposed by holding the shares. The Board places great importance on communication with shareholders. It aims to provide shareholders with a full understanding of the Company’s activities and performance and reports formally to shareholders twice a year by way of the Interim Report and Annual Report and Accounts, particularly the Strategic Report. The Board considers that the Company’s Strategic Report provides information about the performance of the Company, the Investment Policy, strategy and the principal risks and uncertainties relating to the Company’s future prospects so that shareholders have sufficient information to understand the nature of their investment in the Company. A N N U A L R E P O R T 2 0 1 9 3 1 STRATEGIC REPORT | CORPORATE SOCIAL RESPONSIBILITY All of our tenants have broad and deep corporate responsibility targets and we continue to encourage and engage with them, so we can work together to understand their property requirements and provide environmentally efficient Supermarkets which suit their needs. Examples include investing in green energy efficiency schemes, such as energy efficient lighting, solar, battery capture and storage and combined heat and power. These types of schemes may provide incremental additional returns for investors on a risk-adjusted basis, but, importantly, can also assist the underlying operator in meeting certain strategic objectives in areas such as sustainability targets. Social policy Our assets provide important benefits to their local communities. They offer employment, often in areas where traditional industries have declined, boosting the local economy. They also support economic activity more broadly, by underpinning our tenants’ efficient operation and helping them succeed. The Company is committed to delivering its strategic objectives in an ethical and responsible manner and meeting its corporate responsibilities towards society and the environment. The Company’s environmental and social policies address the importance of these issues in the day-to-day running, as detailed below. Environmental policy The Board’s responsibility to society is broader than simply generating financial returns for shareholders and the Board ensures the Investment Adviser acts responsibly in the areas it can influence as a landlord, for example by working with tenants to improve the environmental performance of the Company’s assets and minimise their impact on climate change. The Board believes that following this strategy will ultimately be to the benefit of shareholders through enhanced asset values. The investment properties are let on full repairing and insuring leases, meaning its day-to-day environmental responsibilities are limited as properties are controlled by the tenants. We do not purchase any utilities and we cannot use the lease terms to influence how the tenant operates. As a result, we do not submit performance data to benchmarking indices such as the Global Real Estate Sustainability Benchmark. However, the Board and Investment Adviser adopt sustainable principles where possible and the key elements of the Company’s environmental policy are: • We want our properties to minimise their impact on the local and wider environment. We carefully consider the environmental performance of assets before we acquire them, including obtaining an independent environmental report and energy performance certificate (“EPC”) for all potential acquisitions, which considers, amongst other matters, the historical and current usage of the site and the extent of any contamination present. This report may lead to further enquiries of the vendor, surveyor or legal teams and is considered by the Investment Committee of the Investment Manager when approving the acquisition; • Sites are visited periodically and any obvious environmental issues are reported to the Board. • We perform extensive due diligence on the opportunity to install on-site decarbonised energy producing plant on each acquisition. To date we have completed District Network Operator (“DNO”) applications for the installation of extensive rooftop photovoltaic panels covering over 70% of the total gross internal area of our estate. 3 2 S U P E R M A R K E T I N C O M E R E I T P LC STRATEGIC REPORT | AUDIT COMMITTEE REPORT The Audit Committee comprises Jon Austen and Vince Prior and is chaired by Jon Austen. Jon Austen has sufficient recent and relevant financial experience to act as chair of the Audit Committee. The Audit Committee has responsibility for, amongst other things, the planning and review of the Group’s Annual Report and Accounts and half-yearly reports and the involvement of the Group’s auditors in the process. The Committee focuses in particular on compliance with legal requirements, accounting standards and on ensuring that an effective system of internal financial control is maintained. The Audit Committee also reviews the objectivity of the Group’s auditor and the terms under which the Group’s auditor is appointed to perform non-audit services. The terms of reference of the Audit Committee, which are available at the Company’s registered office for inspection, cover such issues as committee membership, frequency of meetings, quorum requirements and the right to attend meetings. The responsibilities of the Audit Committee covered in the terms of reference relate to the following: external audit, internal audit, financial reporting, internal controls and risk management. The terms of reference also set out reporting responsibilities and the authority of the Committee to carry out its responsibilities. The Audit Committee will meet at a minimum twice a year and at the appropriate times in the reporting and audit cycle and at such other times as the Committee Chairman shall require. The Audit Committee’s primary responsibility is to monitor the integrity of the financial statements of the Company and Group, covering annual and interim reports and financial statements and any other formal announcement relating to financial performance. The Committee reviews that information and reports to the Board on significant financial reporting issues and judgements, having regard to matters communicated to it by the external auditor. In particular, the Committee reviews and challenges where necessary: • the consistency of, and any changes to, accounting policies both from year-to-year and across the Company or Group; • the methods used to account for significant or unusual transactions where different approaches are possible; • whether the Group and Company have followed appropriate accounting standards and made appropriate estimates and judgements, taking into account the views of the external auditor; • the clarity and completeness of disclosure in the Group’s and Company’s financial reports and the context in which statements are made; and • all material information presented with the financial statements, such as the business review and the corporate governance statements relating to the audit and to risk management. Where requested by the Board the Audit Committee also reviews the content of the Annual Report and Accounts to advise the Board whether, taken as a whole, they are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company’s performance, business model and strategy. The other key responsibilities of the Audit Committee are: • overseeing the relationship with the auditor, including an assessment of their independence and the effectiveness of the external audit; • reviewing the adequacy and effectiveness of the Company’s internal financial controls and internal control and risk management systems, including those of the Investment Adviser and their delegates as far as they are relevant to the Company; • reviewing the adequacy and security of the Company’s arrangements for any relevant party to raise concerns, in confidence, about possible wrongdoing in financial reporting, regulatory matters or other relevant matters; • reviewing the Company’s procedures for detecting fraud; and • reviewing the Company’s systems and controls for the prevention of bribery and receiving reports on non-compliance. In overseeing the relationship with the external auditor, the Committee considers and makes recommendations to the Board, to be put to shareholders for approval at the AGM, in relation to the appointment, reappointment or removal of the auditor. If an auditor resigns, the Committee is required to investigate the issues leading to this and to decide whether any action is required. The Committee also makes recommendations on the remuneration of the auditor, including fees for both audit and any non-audit services, ensuring that the level of fees is appropriate to enable an effective and high- quality audit to be conducted while remaining reasonably consistent with other similar real estate companies. Where the auditor undertakes non-audit work, the Committee considers whether that work could be detrimental to the independence of the auditor. The Committee also approves the auditor terms of engagement, including the scope of the audit, and on an annual basis assesses their independence and objectivity, taking into account relevant UK professional and regulatory requirements and the relationship with A N N U A L R E P O R T 2 0 1 9 3 3 CORPORATE GOVERNANCE | AUDIT COMMITTEE REPORT CONTINUED the auditor as a whole, including the provision of any non-audit services to the Group and any services to the Investment Adviser and the Investment Manager. shareholders vote in favour of the reappointment of the auditor, which is proposed as an ordinary resolution at the Company’s forthcoming AGM. Composition of the Audit Committee The Audit Committee currently comprises Jon Austen and Vince Prior, and is chaired by Jon Austen. The Committee has assessed whether its members have the requisite skills to carry out their role and believes that the composition of the Committee remains appropriate. Meetings of the Audit Committee The Audit Committee met twice during the year. Meetings were held on 3 September 2018 and 6 February 2019 prior to the release of the 30 June 2018 results and the December 2018 interim results announcement respectively. Both meetings were attended by both members of the Committee. External audit BDO LLP were initially appointed as auditor of the Company in June 2017 and were reappointed at the AGM held on 6 November 2018. The audit partner is Russell Field. The Committee met formally with the auditor at each Committee meeting during the year. Part of each meeting took place without the Investment Adviser being present to discuss any issues arising relating to them. The Committee’s review of the findings of the audit with the auditor covered: • a discussion of any major issues which arose during the audit of the Company’s accounts to 30 June 2018 and the review of the Group’s interim Report to 31 December 2018; • a review of the key accounting matters and judgements relating to those engagements; • confirmation of the levels of potential adjustments, if any, identified during the engagements; • an assessment of the overall control environment; and • an assessment of the effectiveness of the audit and review processes. The Committee has considered the performance, effectiveness and objectivity of the auditor through its regular meetings and communications with them. The Committee’s assessment is that the auditor has the necessary experience, independence and qualifications to deliver an effective audit, and that their ability to challenge and review the Investment Adviser and Board is sufficient and appropriate. There are therefore currently no plans for re-tendering the audit. The Committee recommends that The total fees charged by the auditor to the Group during the year were £150,000 (13 months to 30 June 2018: £225,000), as disclosed in note 6 to the Group financial statements and including fees accrued for the audit of these financial statements. This total includes £30,000 of non-audit work during the Year largely relating to their work as Reporting Accountants in connection with the Company’s share placing in March 2019. Such work is, in the Committee’s view, most effectively and cost-efficiently carried out by the auditor and is not considered a threat to their independence. The Committee has approved a policy for non-audit services, which aims to comply with the requirements of the FRC’s Revised Ethical Standard 2016 applicable to public interest entities. Non-audit services may not be carried out by the auditor if they are considered to have a direct effect on the financial statements or an indirect effect that is not inconsequential. Risk management and internal control During the year, the Audit Committee reviewed the Group’s risk register, which is maintained by the Investment Adviser subject to the supervision and oversight of the Committee. Taking into account that review, together with its review of the Group’s internal controls and its knowledge of the business, the Committee has reviewed and approved any statements included in the annual report concerning internal controls and risk management. A summary of the risk register is reviewed at least annually by the Board. The Audit Committee has reviewed the adequacy of the Company’s arrangements for any relevant party to raise concerns, in confidence, about possible wrongdoing in financial reporting, regulatory or other relevant matters. The Committee considers that these arrangements allow proportionate and independent investigation of such matters and appropriate follow-up action. It has also reviewed the Company’s Investment Manager’s and Investment Adviser’s procedures for detecting fraud and for preventing bribery and considers them to be appropriate. Significant matters relating to the financial statements The significant issues and judgements that the Committee reviewed before recommending the financial statements to the Board for approval were as follows: 3 4 S U P E R M A R K E T I N C O M E R E I T P LC Matter Description Investment property valuations Revenue recognition Management overriding controls Investment properties make up the majority of the Group’s assets. Investment property valuations are inherently subjective, but the Group operates in a mature and liquid property market in the UK, which is a jurisdiction with well-developed valuation processes and methodologies. The opinion of external valuers is obtained at each reporting date, using recognised valuation techniques and the principles of IFRS 13 “Fair Value Measurement”. The valuations at the balance sheet date were performed by Cushman and Wakefield (“C&W”), who the Audit Committee believes to be suitably independent, competent and experienced to carry out the work. The Committee Chairman attended a meeting between the auditor and C&W which included detailed discussions of material fair value changes and a comparison of changes to external sources. The meeting also included a review of current conditions and recent, relevant transactions to provide a context for the valuations and to allow an assessment of the assumptions and judgements made by C&W. The Committee’s intention is to continue to meet with the valuer in future to discuss their valuations. The Committee considered that the inputs provided by the Group to C&W for the valuations adopted in the financial statements were accurately extracted from the Group’s accounting records. The Committee also reviewed the level of disclosure in note 12 to the financial statements and believes that it meets the requirements of IFRS 13. In accordance with applicable accounting standards, the Group recognises rental income on an accruals basis. Contingent income such as that arising from RPI uplifts is recognised in the income statement in the period in which it is earned. The Committee has reviewed recognised rent receivable from each property in the year based on expectations from a review of each lease agreement and having regard to any contractual rent uplifts which took effect in the year and published RPI data. Under IAS 17 ‘Leases’, the Group is required to recognise rent receivable under operating leases on a straightline basis over the expected term of the lease. This has resulted in the Group accruing £366,000 of uninvoiced rental income in the year to 30 June 2019 (13 months to 30 June 2018: £328,000) in respect of the 1% guaranteed annual uplifts provided within the Sainsbury’s Ashford lease. Following this review the Committee is not aware of any issues that suggest Group revenue has not been recognised in accordance with the requirements of IAS 17. The management of an entity are in a unique position to perpetrate fraud because they have the ability directly or indirectly to manipulate accounting records and prepare fraudulent financial statements by overriding controls that otherwise appear to be operating effectively. The Committee considered that due to the unpredictable way in which such override could occur, there exists a significant risk of material misstatement due to fraud. In relation to the financial statements for the Group, the Committee would have expected that management override of controls would manifest through bias in the key accounting estimates. The Committee considers the key accounting estimate to be the valuation of investment property. This estimate was considered as a separate risk item above. The Committee also considered other accounting estimates which could be subject to bias within the financial statements but did not identify any material issues. The Committee also considered the transactions that occurred between the Group and the Investment Adviser to confirm that they were in accordance with expectations and the terms of the Investment Advisory Agreement. No issues were identified in relation to these transactions. The Committee did not identify any instances where management have overridden controls to give rise to a material misstatement within the financial records of the Group. A N N U A L R E P O R T 2 0 1 9 3 5 CORPORATE GOVERNANCE | AUDIT COMMITTEE REPORT CONTINUED Matter REIT status Description The Company and its subsidiaries gave notice to HMRC on 20 December 2017 that they would be operating as a UK REIT, effective from 21 December 2017. Any failure to comply with the various conditions that are required to be satisfied on an on-going basis to operate as a UK REIT could have a material impact on the tax balances that need to be reflected in the financial records of the Group. The Committee reviewed a copy of the notice submitted by the Company to HMRC on 20 December 2017. Following successful entry into the UK REIT regime the Group’s exposure to UK taxation is minimal. The Committee reviewed the Group’s compliance with the various requirements of the UK REIT regime having regard to the work undertaken by the auditors and their tax specialists. The tax calculations and reconciliations prepared by the Investment Adviser for the purposes of inclusion in the Group’s financial statements were considered to ensure that the provisions appropriately reflect the tax payable by the Group at the reporting date in respect of its profits that are excluded from inclusion in the UK REIT regime. The Committee has not identified any issues to suggest that the tax provisions and disclosures contained within the Group’s financial statements are materially inappropriate. Going concern and viability statement The Board is required to consider whether the Group has adequate resources to continue in operational existence for the foreseeable future, which is considered to be at least 12 months from the date of approval of the Annual Report and Accounts. The Audit Committee has reviewed the work of the Investment Adviser on going concern, which included a report on the Group’s liquidity position, compliance with loan covenants and the financial strength of its tenants, together with forecasts of the Group’s cash flow over the period to at least September 2020. As a result, the Committee has concluded that the going concern basis of preparation for the financial statements remains appropriate. The Committee has also reviewed the work of the Investment Adviser to support the viability statement included in the Strategic Report, which included forecasts of the Group’s results over the period to June 2024. In carrying out this review, the Committee considered the risks and assumptions relevant to those forecasts, together with the various sensitivity scenarios modelled in them. As a result, the Committee has concluded that there is a reasonable expectation that the Group will be able to continue in business over the five year period of the assessment. Signed on behalf of the Audit Committee on 3 September 2019. Jon Austen Audit Committee Chairman 3 September 2019 3 6 S U P E R M A R K E T I N C O M E R E I T P LC CORPORATE GOVERNANCE | DIRECTORS’ REPORT The Directors present their report together with the audited financial statements for the year ended 30 June 2019. The Corporate Governance Statement pages 26 to 31 forms part of their report. Results and dividends The results for the year are set out in the attached financial statements. It is the policy of the Board to declare and pay dividends as quarterly interim dividends. During the year and subsequently, the following interim dividends amounting to aggregate 5.558 pence per share were declared: Date declared Amount per share (pence) Date paid 17 July 2018 8 October 2018 8 January 2019 8 April 2019 8 July 2019 1.375 23 August 2018 1.375 6 November 2018 8 February 2019 1.419 7 May 2019 1.419 7 August 2019 1.419 Dividend policy Subject to market conditions and performance, financial position and outlook, it is the Directors’ intention to pay an attractive level of dividend income to shareholders on a quarterly basis. The Company intends to grow the dividend progressively through investment in supermarket properties with upward-only, inflation- protected, long-term lease agreements. Principal activities and status Supermarket Income REIT plc (the “Company” or “Group”) is registered as a public limited company under the Companies Act 2006. It is an Investment Company as defined by Section 833 of the Companies Act 2006 and has been established as a closed-ended investment company with an indefinite life. The Company has a single class of shares in issue which are traded on the Specialist Fund segment of the London Stock Exchange’s Main Market. The Group has entered the Real Estate Investment Trust (REIT) regime for the purposes of UK taxation. The Company is a member of the Association of Investment Companies (the “AIC”). Strategy and investment policy The strategy and investment objectives of the Group are set out in the Strategic Report on pages 1 to 18. Risk management and internal control The Board is responsible for financial reporting and controls, including the approval of the Annual Report and Accounts, the dividend policy, any significant changes in accounting policies or practices, and treasury policies including the use of derivative financial instruments. During the year the Board has carried out a robust assessment of the principal risks facing the Group and how they are being mitigated, as described in the Strategic Report on pages 1 to 18. In light of the Group’s current position and principal risks, the Board has assessed the prospects of the Group for a period of 12 months from the date of this Annual Report, reviewing the Group’s liquidity position, compliance with loan covenants and the financial strength of its tenants, together with forecasts of the Group’s future performance under various scenarios. The Board has concluded there is a reasonable expectation that the Group will be able to continue in operation and meet its liabilities over that period. The Board has also assessed the prospects of the Group over a longer period than the going concern review and has a reasonable expectation that the Group will be able to continue in business over the five year period examined in that assessment. The Board is also responsible for the internal controls of the Group, including operational and compliance controls and risk management systems, which are documented in a Board memorandum. We have contractually delegated responsibility for administrative, accounting and secretarial services to the Administrator (“JTC”). JTC have their own internal control systems relating to these matters. The Board and the Investment Adviser have together reviewed all financial performance and results notifications. Non-financial internal controls include the systems of operational and compliance controls maintained by JTC. As with any risk management system, the Group’s internal control framework is designed to manage risk but cannot give absolute assurance that there will never be any material misstatement or loss. The Board has reviewed the risk management and internal control framework in the year and believes it to be working effectively. The Board has considered the appropriateness of establishing an internal audit function and, having regard to the relatively simple nature of the Group’s operations and the likely cost of such a function, has concluded that it is not necessary at this stage. The Board meets at least every quarter to review the Group’s performance against its strategic aims, objectives, business plans and budgets and ensures that any corrective action considered necessary is taken. Additional meetings are held as required to deal with the business of the Group in a timely manner. Directors are expected to attend all meetings of the Board and all meetings of those committees on which they sit, as well as the Annual General Meeting (the “AGM”). Meetings called outside the scheduled A N N U A L R E P O R T 2 0 1 9 3 7 CORPORATE GOVERNANCE | DIRECTORS’ REPORT CONTINUED quarterly Board meetings may need to be convened at relatively short notice and therefore at times when not every Director is available. Every meeting during the year has however been correctly convened with an appropriate quorum. Details of Directors’ attendance at each of the scheduled Board and Committee meetings during the year are set out below: Director Nick Hewson Vince Prior Jon Austen Audit Committee Quarterly Board N/A 2/2 2/2 3/3 3/3 3/3 All Directors attended the Company’s AGM held on 6 November 2018. Directors All three Directors retired and were re-elected at the AGM on 6 November 2018. In accordance with the Articles of Association, all Directors are required to retire and seek re-election at least every three years. Although not required by the Company’s Articles of Association, the Company is choosing to comply voluntarily with the provision of the UK Corporate Governance Code requiring all directors of FTSE 350 companies to be subject to annual election. All three Directors retire at each AGM and those eligible and wishing to serve again offer themselves for election. The Company maintains £10 million of Directors’ and Officers’ Liability Insurance cover for the benefit of the Directors, which was in place throughout the year and which continues in effect at the date of this report. Directors’ interests The beneficial interests of the Directors and their families in the Ordinary shares of the Company as at 30 June 2019 were as follows: Nick Hewson Jon Austen Vince Prior Number of shares 380,000 99,000 55,431 Percentage of issued share capital 0.16% 0.04% 0.02% Significant shareholdings As at 6 August 2019 the Directors have been notified that the following shareholders have a disclosable interest of 3% or more in the ordinary shares of the Company: Number of shares Percentage of issued share capital 26,649,757 11.11 Quilter Cheviot Investment Management Smith & Williamson Investment Management 16,842,839 BMO Global Asset Management Premier Fund Management West Yorkshire Pension Fund Canaccord Genuity Wealth Close Asset Management River & Mercantile Asset Management TR Property Investment Trust Ruffer Miton Asset Management Brooks Macdonald Asset Management Charles Stanley 14,842,500 14,410,770 14,166,291 14,001,484 13,595,957 13,525,280 11,289,711 9,310,994 8,090,603 7,768,953 7,473,334 7.02 6.19 6.01 5.91 5.84 5.67 5.64 4.71 3.88 3.37 3.24 3.12 Political contributions The Group made no political contributions during the year (13 months to June 2018: none). Greenhouse gas emissions reporting The Board has considered the requirement to disclose the Company’s measured carbon emissions sources under the Companies Act 2006 (Strategic report and Director’s report) Regulations 2013. During the year ended 30 June 2019: • performed extensive due diligence on the opportunity to install on-site decarbonised energy producing plant across our estate. To date we have commenced District Network Operator (DNO) applications for the installation of extensive rooftop photovoltaic panels covering over 70% of the total GIA of our estate. Through green energy investment, we not only generate an income producing asset but also reduce costs for our tenants whilst also assisting their transition to a lower carbon emission future 3 8 S U P E R M A R K E T I N C O M E R E I T P LC • any emissions from the Group’s properties have been the tenant’s responsibility rather than the Group’s, so the principle of operational control has been applied; • any emissions that are either produced from the Company’s registered office or from offices used to provide administrative support are deemed to fall under the Investment Adviser and Investment Manager’s responsibility; and • the Group has not leased or owned any vehicles which fall under the requirements of Mandatory Emissions Reporting. Auditor BDO LLP was appointed as auditor by the Directors in June 2017 and was re-appointed as auditor by the Company’s shareholders at the AGM held on 6 November, 2018. BDO LLP have expressed their willingness to continue as auditor for the financial year ending 30 June 2020. A resolution to appoint BDO LLP as auditor of the Company will be proposed at the forthcoming AGM. Signed by order of the Board on 3 September 2019. As such, the Board believes that the Company has no reportable emissions for the year ended 30 June 2019 (13 month to June 2018: none). Nick Hewson Chairman 3 September 2019 Employees The Group has no employees and therefore no employees share scheme or policies for the employment of disabled persons or employee engagement. Post balance sheet events On 28 August 2019, the Group completed the acquisition of its eighth supermarket asset, a Sainsbury’s superstore in Preston, Lancashire with an unexpired lease term of 23 years, for £54.4 million (net of acquisition costs), reflecting a net initial yield of 5.1%. The Group has also arranged a new £47.6 million debt facility and an uncommitted £40 million accordion option provided by Deka Bank, fixed at 1.9% for the five year term of the facility. The accordion option allows the Group to expand the £48.1m debt by a further £40 million subject to Deka Bank credit approval. Other disclosures Disclosures of financial risk management objectives and policies and exposure to financial risks are included in note 16 to the financial statements. Details of future developments are included in the Strategic Report on pages 1 to 18. Disclosure of information to auditor All of the Directors have taken all the steps that they ought to have taken to make themselves aware of any information needed by the auditor for the purposes of their audit and to establish that the auditor is aware of that information. The Directors are not aware of any relevant audit information of which the auditor is unaware. A N N U A L R E P O R T 2 0 1 9 3 9 CORPORATE GOVERNANCE | DIRECTORS’ REMUNERATION REPORT Annual Statement The Board comprises only independent non-executive Directors. The Group has no executive Directors or employees. For these reasons, it is not considered necessary to have a separate Remuneration Committee. The full Board determines the level of Directors’ fees. Full details of the Group’s policy with regards to Directors’ fees and fees paid during the year ended 30 June 2019 are shown below. Directors’ remuneration policy The Board considers the level of Directors’ fees at least annually. Reviews of Directors’ fees take place in each financial year with any changes being applicable from the start of the next financial year. The remuneration of the Directors’ was benchmarked at the time of the Company’s listing in June 2017 and again in December 2018. The Directors’ remuneration has remained unchanged. The remuneration of the Directors for their services are determined within the limit set out in the Company’s Articles of Association. The present limit states that fees in aggregate shall not exceed £500,000 per annum but this may be changed by way of ordinary resolution. Directors can also be paid additional remuneration if approved at a General Meeting. Directors’ fees are fixed and payable in cash, monthly in arrears. Directors are Director Nick Hewson Jon Austen Vince Prior not eligible for bonuses, pension benefits, share options, long term incentive schemes or other benefits. The Company may repay to any Director all such reasonable expenses incurred in undertaking their duties. It is the Board’s policy that Directors do not have service contracts, but each new Director is provided with a letter of appointment. In accordance with the terms of the Directors’ appointments all Directors retired and were re-elected at the first Annual General Meeting on 6 November 2018. At each AGM Shareholders are offered the chance to approve the re-election of each Director. The Directors’ remuneration policy was approved by shareholders at the 2018 AGM and shareholder approval will be sought for any proposed changes to that policy prior it being subject to another shareholder vote in 2021 In accordance with the Articles of Association, all Directors are required to retire and seek re-election at least every three years. Although not required by the Company’s Articles of Association, the Company is choosing to comply voluntarily with the provision of the UK Corporate Governance Code requiring all directors of FTSE 350 companies to be subject to annual election. All three directors retire at each annual general meeting and those eligible and wishing to serve again offer themselves for election. Date of original appointment Most recent date of election Latest due date of re-election 20 June 2017 20 June 2017 20 June 2017 6 November 2018 7 November 2019 6 November 2018 7 November 2019 6 November 2018 7 November 2019 Directors’ emoluments for the year The Directors who served during the year received the following emoluments in the form of fees: Nick Hewson Jon Austen Vince Prior Year ended 30 June 2019 £000 Period ended 30 June 2018 £000 55 40 39 60 42 39 Relative importance of spend on pay The table below sets out, in respect of the year ended 30 June 2019: a) The remuneration paid to the Directors; b) The management fee and expenses which have been included to give shareholders a greater understanding of the relative importance of spend on pay; and c) Distributions to shareholders by way of dividend. 4 0 S U P E R M A R K E T I N C O M E R E I T P LC Year ended 30 June 2019 £000 Period ended 30 June 2018 £000 146 1,840 10,934 160 1,079 4,675 Year ended 30 June 2019 % Period ended 30 June 2018 % 7.9 1.33 14.3 3.42 It is a company law requirement to compare the performance of the Group’s share price to a single broad equity market index on a total return basis. However, it should be noted that constituents of the comparative index used above are larger in size than the Group. The Group does not have a benchmark index. Voting at Annual General Meeting Ordinary resolutions for the approval of this Report on Directors’ Remuneration Report and of the Directors’ remuneration policy will be put to shareholders at the AGM. On behalf of the Board Nick Hewson Chairman 3 September 2019 Directors’ fees Management fee and expenses Dividends paid Director’s fees as a percentage of: Management fee and expenses Dividends paid Directors’ shareholdings The Directors, including connected parties, who held office at the 30 June 2019 and their interests in the Ordinary Shares of the Company as at that date are set out in the Directors’ Report on pages 37 to 39. Group performance The Board is responsible for the Group’s investment strategy and performance, whilst the management of the investment portfolio is delegated to the Investment Manager. The Investment Manager has in turn delegated certain services, including but not limited to advice on acquisitions and financing, to the Investment Adviser. The graph below compares, for the year from 1 July 2018 to 30 June 2019, the total return (assuming all dividends are reinvested) to ordinary shareholders compared to the FTSE All-Share Index. This index was chosen as it is considered an indicative measure of the expected return from an equity stock. An explanation of the performance of the Group for the year ended 30 June 2019 is given in the Strategic Report. FTSE 100 vs SUPR (Indexed) 110 105 100 95 90 85 e c n a m r o f r e p e v i t a l e R JUL17 SEP17 DEC17 MAR18 JUN18 SEP18 DEC18 MAR19 JUN19 Supermarket REIT FTSE 100 A N N U A L R E P O R T 2 0 1 9 4 1 CORPORATE GOVERNANCE | DIRECTORS’ RESPONSIBILITIES STATEMENT Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Directors’ Report, Directors’ Remuneration Report and Corporate Governance Statement that comply with the relevant law and regulations. The Company is required to make the Annual Report and Accounts available on a website. The Company’s website address is www.SupermarketIncomeREIT.co.uk. Financial statements are published on the Company’s website in accordance with legislation in the United Kingdom governing the preparation and dissemination of financial statements, which may vary from such legislation in other jurisdictions. The maintenance and integrity of the Company’s website is the responsibility of the Directors. The Directors’ responsibility also extends to the ongoing integrity of the financial statements contained therein. Responsibility Statement The Directors confirm to the best of their knowledge: • The Group financial statements prepared in accordance with International Financial Reporting Standards as adopted by the European Union and Article 4 of the IAS Regulation, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group. • The Annual Report and Accounts include a fair review of the development and performance of the business and the position of the Group and Company, together with a description of the principal risks and uncertainties that they face. • The Annual Report and Accounts taken as whole, is fair, balanced and understandable and the information provided to shareholders is sufficient to allow them to assess the Group’s performance, business model and strategy. This Responsibility Statement was approved by the Board of Directors and is signed on its behalf by: Nick Hewson Chairman 3 September 2019 The Directors are responsible for preparing the Annual Report and Accounts in accordance with applicable law and regulations. The UK Companies Act 2006 requires the Directors to prepare financial statements for each financial period. Under that law, the Directors have elected to prepare the Group financial statements in accordance with International Financial Reporting Standards as adopted by the European Union, and the Company financial statements in accordance with applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice), including Financial Reporting Standard 102 “The Financial Reporting Standard applicable in the UK and Republic of Ireland”. Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Company and of the profit or loss of the Group for that period. In preparing these financial statements, the Directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and accounting estimates that are reasonable and prudent; • state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; and • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and Company will continue in business. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the requirements of the Companies Act 2006 and as regards the Group financial statements, Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for such internal control as they determine necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. 4 2 S U P E R M A R K E T I N C O M E R E I T P LC CORPORATE GOVERNANCE | ALTERNATIVE INVESTMENT FUND MANAGER’S REPORT 3. Leverage and borrowing The Company is entitled to employ leverage in accordance with its investment policy and as described in the sections entitled “Debt Financing” in the Chairman’s Statement and “Financing and Hedging” in the Investment Adviser’s Report and in notes 17 and 25 to the financial statements. Other than as disclosed therein, there were no changes in the Company’s borrowing powers and policies. 4. Remuneration of the AIFM’s Directors and Employees During the financial year under review, no separate remuneration was paid by the AIFM to its executive directors, James Tracey and Graham Taylor, because they were both employees of the JTC group of companies, of which the AIFM forms part. Matthew Tostevin is a non-executive director and is paid a fixed fee of £10,000 for acting in such capacity. Other than the directors, the AIFM has no employees. The Company has no agreement to pay any carried interest to the AIFM. 5. Remuneration of the AIFM Payable by the Company The AIFM was during the period under review paid a fee of 0.04% per annum of the net asset value of the Company, subject to a minimum of £50,000 per annum. The total fees paid to the AIFM during the year under review were £79,000. Graham Taylor JTC Global AIFM Solutions Limited Alternative Investment Fund Manager 3 September 2019 Background The Alternative Investment Fund Manager’s Directive (“AIFMD”) came into force on 22 July 2013. The objective of the AIFMD was to ensure a common regulatory regime for funds marketed in or into the EU which are not regulated under the UCITS regime. This was primarily for investors’ protection and also to enable European regulators to obtain adequate information in relation to funds being marketed in or into the EU to assist their monitoring and control of systemic risk issues. The AIFM is a non-EU AIFM, although the Company is an EU Alternative Investment Fund (an “AIF”) and the Company is marketed into the EU, primarily the United Kingdom. Although the AIFM is a non-EU AIFM, so the depositary rules in Article 21 of the Alternative Investment Fund Managers Directive (the “AIFMD”) do not apply, the transparency requirements of Articles 22 (Annual report) and 23 (Disclosure to investors) of the AIFMD do apply to the AIFM and therefore to the Company. In compliance with those articles, the following information is provided to the Company’s shareholders by the AIFM. 1. Material Changes in the Disclosures to Investors During the financial year under review, there were no material changes to the information required to be made available to investors before they invest in the Company under Article 23 of the AIFMD from that information set out in the Company’s prospectus dated 25 April 2018 (comprising the registration document, summary and securities note), save as updated in the Summary and Securities Note published on 12 March 2019 and as disclosed below and in the Strategic Report, which comprises the Chairman’s Statement, Achievements in Brief, Our Portfolio, Investment Adviser’s Report, Our Market and Our Principal Risks sections in this Annual Report and Accounts. 2. Risks and Risk Management Policy The current principal risks facing the Company and the main features of the risk management systems employed by AIFM and the Company to manage those risks are set out in the Strategic Report and in notes 16 and 18 to the financial statements. A N N U A L R E P O R T 2 0 1 9 4 3 CORPORATE GOVERNANCE | INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF SUPERMARKET INCOME REIT PLC Opinion We have audited the financial statements of Supermarket Income REIT Plc (the ‘Parent Company’) and its subsidiaries (the ‘Group’) for the year ended 30 June 2019 which comprise the consolidated statement of comprehensive income, consolidated and company statements of financial position, consolidated and company statements of changes in equity, consolidated cash flow and notes to the financial statements, including a summary of significant accounting policies. The financial reporting framework that has been applied in the preparation of the Group financial statements is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. The financial reporting framework that has been applied in the preparation of the Parent Company financial statements is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice), including Financial Reporting Standard 102 The Financial Reporting Standard in the United Kingdom and Republic of Ireland. In our opinion: • the financial statements give a true and fair view of the state of the Group’s and of the Parent Company’s affairs as at 30 June 2019 and of the Group’s profit for the year then ended; • the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; • the Parent Company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006; and, as regards the Group financial statements, Article 4 of the IAS Regulation. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report. We are independent of the Group and the Parent Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard as applied to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Conclusions relating to principal risks, going concern and viability statement We have nothing to report in respect of the following information in the Annual Report, in relation to which the ISAs (UK) require us to report to you whether we have anything material to add or draw attention to: • the disclosures in the Annual Report and Accounts set out on pages 20 to 25 that describe the principal risks and explain how they are being managed or mitigated; • the Directors’ confirmation set out on page 37 in the Annual Report and Accounts that they have carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity; • the Directors’ statement set out on page 37 in the financial statements about whether the Directors considered it appropriate to adopt the going concern basis of accounting in preparing the financial statements and the Directors’ identification of any material uncertainties to the Group and the Parent Company’s ability to continue to do so over a period of at least twelve months from the date of approval of the financial statements; 4 4 S U P E R M A R K E T I N C O M E R E I T P LC • whether the Directors’ statement relating to going concern required under the Listing Rules in accordance with Listing Rule 9.8.6R(3) is materially inconsistent with our knowledge obtained in the audit; or • the Directors’ explanation set out on page 37 in the Annual Report and Accounts as to how they have assessed the prospects of the Group, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions. Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified, including those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Our application of materiality We apply the concept of materiality both in planning and performing our audit, and in evaluating the effect of misstatements. We consider materiality to be the magnitude by which misstatements, including omissions, could influence the economic decisions of reasonable users that are taken on the basis of the financial statements. In order to reduce to an appropriately low level the probability that any misstatements exceed materiality, we use a lower materiality level, performance materiality, to determine the extent of testing needed. Importantly, misstatements below these levels will not necessarily be evaluated as immaterial as we also take account of the nature of identified misstatements, and the particular circumstances of their occurrence, when evaluating their effect on the financial statements as a whole. The materiality for the Group financial statements as a whole was set at £3.6 million. This was determined with reference to a benchmark of Group property assets (of which it represents 1.0 per cent) which we consider to be one of the principal considerations for the users of the financial statements in assessing the financial performance of this asset based business. Key audit matter How we addressed the key audit matter in the audit Valuation of investment properties As detailed in note 12, the Group owns a portfolio of investment properties which, as described in the accounting policy in note 3.8, are held at fair value in the Group financial statements. As described in the Group’s significant accounting judgements, estimates and assumptions in note 2, determination of the fair value of investment properties is a key area of estimation and we therefore considered this to be an area of significant audit risk and focus. The Group engages an independent expert valuer to help mitigate this risk. The valuation of the Group’s investment properties requires significant judgements to be made by the external valuer and any inaccuracies in information provided to the valuer or unreasonable judgements could result in a material misstatement of the income statement and balance sheet. Our audit work included, but was not restricted to, the following: • We assessed the competency, qualifications, independence and objectivity of the external valuer engaged by the Group and reviewed the terms of their engagement for any unusual arrangements. • We read the valuation report and confirmed that all valuations had been prepared on a basis that was appropriate for determining the carrying value in the Group’s financial statements. • The senior members of our team met with the Group’s external valuer to discuss and challenge the valuation methodology, key assumptions and to consider if there were any indicators of undue management influence on the valuations. • We tested the accuracy of the key observable valuation inputs supplied to and used by the external valuer. This primarily involved agreeing the passing rental income and lease terms to underlying supporting documentation. • We compared the key valuation assumptions against our independently formed market expectations and challenged the external valuer where significant variances from these expectations were identified. We then corroborated their responses against supporting documentation where appropriate. The key valuation assumptions were the market capitalisation rates, which we reviewed by reference to market data based on the location and specifics of each property. • We reviewed the appropriateness of the Group’s disclosures within the financial statements in relation to valuation methodology, key valuation inputs and valuation uncertainty. Key observations We did not identify any indicators to suggest that the valuation of the Group’s investment properties is inappropriate. A N N U A L R E P O R T 2 0 1 9 4 5 FINANCIAL STATEMENTS | INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF SUPERMARKET INCOME REIT PLC CONTINUED The materiality for the Parent Company financial statements as a whole was set at £2.6 million, determined with reference to a benchmark of the Parent Company’s total assets (of which it represents 1.1 per cent) on the basis that this is an asset based investment entity. ISAs (UK) also allow the auditor to set a lower materiality for particular classes of transactions, balances or disclosures for which misstatements of lesser amounts than materiality for the financial statements as a whole could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. In this context, we set a lower level of materiality of £450,000 to apply to those classes of transactions and balances which impact on the Group’s EPRA earnings. This was determined with reference those EPRA earnings for the year (of which it represents 4.5 per cent). The materiality level applied in the previous period was £2.6 million for the Group financial statements and £1.7 million for the Parent Company financial statements, with the specific materiality level applied to items affecting EPRA earnings being £220,000. The same benchmarks were applied in each period, with the increases in the current year figures arising as a result of the increases in the Group’s property assets and EPRA earnings. We set performance materiality at 75% (2018: 75%) of the respective materiality levels for both the Group and Parent Company, having considered a number of factors including the expected total value of known and likely misstatements based on previous assurance engagements and other factors. We agreed with the Audit Committee that we would report to the Committee all individual audit differences in excess of £75,000 (2018: £130,000). We also agreed to report differences in excess of £10,000 (2018: £11,000) that impacted upon EPRA earnings and others that, in our view, warranted reporting on qualitative grounds. An overview of the scope of our audit Our Group audit was scoped by obtaining an understanding of the Group and its environment, including the Group’s system of internal control, applicable legal and regulatory framework and the industry in which it operates, and assessing the risks of material misstatement at the Group level. The Group operates solely in the United Kingdom and operates through one segment, investment property, structured through a number of subsidiary special purpose vehicle companies. The Group audit engagement team performed all the work necessary to issue the Group and Parent Company audit opinion, including undertaking all of the audit work on the risks of material misstatement identified above. The extent to which the audit is capable of detecting irregularities is affected by the inherent difficulty in detecting irregularities, the effectiveness of the entity’s controls, and the nature, timing and extent of the audit procedures performed. Irregularities that result from fraud might be inherently more difficult to detect than irregularities that result from error. As part of the audit we gained an understanding of the legal and regulatory framework applicable to the Group and the industry in which it operates, and considered the risk of acts by the Group that were contrary to applicable laws and regulations, including fraud. We considered the Group’s compliance with laws and regulations that have a direct impact on the financial statements including, but not limited to, UK company law and UK tax legislation (including the REIT regime requirements), and we considered the extent to which non-compliance might have a material effect on the Group financial statements. We designed audit procedures to respond to the risk, recognising that the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for example, forgery or intentional misrepresentations, or through collusion. 4 6 S U P E R M A R K E T I N C O M E R E I T P LC Our tests included reviewing the financial statement disclosures and agreeing to underlying supporting documentation where necessary. We made enquiries of management and of the Board as to the risks of non- compliance and any instances thereof, and made similar enquiries of advisers to the Group, where information from that adviser has been used in the preparation of the Group financial statements. As in all of our audits, we also addressed the risk of management override of internal controls, including testing journals and evaluating whether there was evidence of bias by the Board that represented a risk of material misstatement due to fraud. There are inherent limitations in the audit procedures described above and, the further removed non- compliance with laws and regulations is from the events and transactions reflected in the financial statements, the less likely we would become aware of it. Other information The Directors are responsible for the other information. The other information comprises the information included in the Annual Report and Accounts 2019, other than the financial statements and our auditor’s report thereon. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of the other information, we are required to report that fact. We have nothing to report in this regard. In this context, we also have nothing to report in regard to our responsibility to specifically address the following items in the other information and to report as uncorrected material misstatements of the other information where we conclude that those items meet the following conditions: • Fair, balanced and understandable set out on page 42 – the statement given by the Directors that they consider the Annual Report and Accounts taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s performance, business model and strategy, is materially inconsistent with our knowledge obtained in the audit; or • Audit Committee reporting set out on pages 33 to 36 – the section describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee; or • Directors’ statement of compliance with the UK Corporate Governance Code set out on page 28 – the parts of the Directors’ statement required under the Listing Rules relating to the Company’s compliance with the UK Corporate Governance Code containing provisions specified for review by the auditor in accordance with Listing Rule 9.8.10R(2) do not properly disclose a departure from a relevant provision of the UK Corporate Governance Code. Opinions on other matters prescribed by the Companies Act 2006 In our opinion, the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006. In our opinion, based on the work undertaken in the course of the audit: • the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements; and • the Strategic Report and the Directors’ Report have been prepared in accordance with applicable legal requirements. A N N U A L R E P O R T 2 0 1 9 4 7 FINANCIAL STATEMENTS | INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF SUPERMARKET INCOME REIT PLC CONTINUED In preparing the financial statements, the Directors are responsible for assessing the Group’s and the Parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Group or the Parent Company or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at: www.frc.org.uk/ auditorsresponsibilities. This description forms part of our auditor’s report. Matters on which we are required to report by exception In the light of the knowledge and understanding of the Group and Parent Company and its environment obtained in the course of the audit, we have not identified material misstatements in the Strategic Report or the Directors’ Report. We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if, in our opinion: • adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been received from branches not visited by us; or • the Parent Company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting records and returns; or • certain disclosures of Directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit. Responsibilities of Directors As explained more fully in the Statement of Directors Responsibilities in Respect of the Annual Report and Accounts , the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the Directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. 4 8 S U P E R M A R K E T I N C O M E R E I T P LC Other matters which we are required to address Following the recommendation of the Audit Committee, we were appointed by the Directors in June 2017 to audit the financial statements for the period ending 30 June 2018. We were subsequently reappointed by the members at the Parent Company’s first Annual General Meeting in November 2018. The period of total uninterrupted engagement is two years, covering the periods ending 30 June 2018 and 30 June 2019. The non-audit services prohibited by the FRC’s Ethical Standard were not provided to the Group or the Parent Company and we remain independent of the Group and the Parent Company in conducting our audit. Our audit opinion is consistent with the additional report to the Audit Committee. Use of our report This report is made solely to the Parent Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Parent Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Parent Company and the Parent Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Russell Field (Senior Statutory Auditor) For and on behalf of BDO LLP, Statutory Auditor London, United Kingdom 3 September 2019 BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127). A N N U A L R E P O R T 2 0 1 9 4 9 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE 2019 Rental income Administrative and other expenses Operating profit before changes in fair value of investment properties Changes in fair values of investment properties Operating profit Finance expense Profit before taxation Tax charge for the year/period Profit for the year/period 1 July 2018 to 30 June 2019 £000 1 June 2017 to 30 June 2018 £000 17,231 (3,088) 8,942 (2,097) Notes 4 5 12 8 9 14,143 6,845 647 14,790 (4,081) 2,764 (4,180) (1,917) 10,610 (18) 10,593 847 (227) 620 Items to be reclassified to profit or loss in subsequent periods Changes in fair value of interest rate derivatives 16 (1,121) (82) Total comprehensive income for the year/ period Total comprehensive income for the year/period attributable to ordinary shareholders 9,471 9,471 538 538 Earnings per share – basic and diluted 10 5.3 pence 0.5 pence 5 0 S U P E R M A R K E T I N C O M E R E I T P LC CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2019 Non-current assets Investment properties Interest rate derivatives Total non-current assets Current assets Trade and other receivables Cash and cash equivalents Total current assets Total assets Non-current liabilities Bank borrowings Interest rate derivatives Total non-current liabilities Current liabilities Deferred rental income Corporation tax liability Trade and other payables Total current liabilities Total liabilities Net assets Equity Share capital Share premium reserve Capital reduction reserve Retained earnings Cash flow hedge reserve Total equity Net asset value per share – basic and diluted EPRA NAV per share As at 30 June 2019 £000 As at 30 June 2018 £000 Notes 12 16 368,230 – 264,900 37 368,230 264,937 14 3,521 9,898 13,419 1,035 2,239 3,274 381,649 268,211 17 16 143,708 1,113 88,099 144,821 88,099 3,543 245 2,570 6,358 1,666 227 1,473 3,366 151,179 91,465 230,470 176,746 2,398 203,672 14,391 11,212 (1,203) 1,844 149,039 25,325 620 (82) 230,470 176,746 96 pence 96 pence 97 pence 96 pence 15 19 19 19 23 23 The consolidated financial statements were approved and authorised for issue by the Board of Directors on 3 September 2019 and were signed on its behalf by: Nick Hewson Chairman A N N U A L R E P O R T 2 0 1 9 5 1 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR 1 JULY 2018 TO 30 JUNE 2019 Share capital £000 As at 1 July 2018 Comprehensive income for the year 1,844 – Profit for the year Other comprehensive income Total comprehensive income for the year – – – Share premium reserve £000 149,039 – – – – Cash flow hedge reserve £000 (82) – – (1,121) (1,121) Capital reduction reserve £000 25,325 – – – – Retained earnings £000 620 – 10,593 – Total £000 176,746 – 10,593 (1,122) 10,593 9,471 Transactions with owners Ordinary shares issued at a premium during the year Share issue costs Interim dividends paid 554 – – 55,695 (1,062) – – – – – – (10,934) – – – 56,249 (1,062) (10,934) As at 30 June 2019 2,398 203,672 (1,203) 14,391 11,212 230,470 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE PERIOD 1 JUNE 2017 TO 30 JUNE 2018 Share capital £000 Share premium reserve £000 Cash flow hedge reserve £000 Capital reduction reserve £000 Retained earnings £000 As at 1 June 2017 Comprehensive income for the period Profit for the period Other comprehensive income Total comprehensive income for the period – – – – – – Transactions with owners Ordinary shares issued at a premium during the period Share issue costs Issue of redeemable preference shares Redemption of redeemable preference shares Transfer to capital reduction reserve Interim dividends paid 1,844 – 183,156 (4,117) 12 (12) – – – – (30,000) – – (82) (82) – – – – – – – – – – – – – 30,000 (4,675) 620 – 620 – – – – – – Total £000 620 (82) 538 185,000 (4,117) 12 (12) – (4,675) As at 30 June 2018 1,844 149,039 (82) 25,325 620 176,746 5 2 S U P E R M A R K E T I N C O M E R E I T P LC CONSOLIDATED CASH FLOW FOR THE YEAR 1 JULY 2018 TO 30 JUNE 2019 Operating activities Profit for the year/period (attributable to ordinary shareholders) Adjustments for: Changes in fair value of Investment properties Movement in rent smoothing adjustments Finance expense Tax expense Cash flows from operating activities before changes in working capital Increase in trade and other receivables Increase in deferred rental income Increase in trade and other payables Cash flows from operating activities Investing activities Acquisition of investment properties Capitalised acquisition costs Net cash flows used in investing activities Financing activities Proceeds from issue of ordinary share capital Costs of share issues Issue of redeemable preference shares Redemption of redeemable preference shares Bank borrowings drawn Bank borrowings repaid Loan arrangement fees paid Bank interest paid Bank commitment fees paid Interest rate cap premium paid Dividends paid to equity holders Net cash flows from financing activities Net increase in cash and cash equivalents for the year/period Cash and cash equivalents at the beginning of the year/ period Cash and cash equivalents at the end of the year/period 1 July 2018 to 30 June 2019 £000 1 June 2017 to 30 June 2018 £000 Notes 10,593 620 12 4 8 9 12 19 19 19 19 17 17 17 17 17 16 11 (647) (366) 4,180 18 13,777 (2,486) 1,877 745 13,913 4,081 (328) 1,917 227 6,517 (1,035) 1,666 913 8,061 (85,450) (5,617) (254,540) (14,113) (91,067) (268,653) 45,000 (1,062) – – 128,341 (72,291) (933) (3,323) (42) (27) (10,850) 185,000 (4,117) 12 (12) 98,430 (9,586) (1,029) (1,053) (94) (158) (4,562) 84,813 262,831 7,659 2,239 9,898 2,239 – 2,239 A N N U A L R E P O R T 2 0 1 9 5 3 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of preparation General information Supermarket Income REIT plc (‘the Company’) is a company registered in England and Wales with its registered office at 7th Floor 9 Berkeley Street, London, United Kingdom, W1J 8DW. The principal activity of the Company and its subsidiaries (‘the Group’) is to provide its shareholders with an attractive level of income together with the potential for capital growth by investing in a diversified portfolio of supermarket real estate assets in the UK. At 30 June 2019 the Group comprised the Company and its wholly owned subsidiaries as set out in Note 13. Each of these subsidiaries is incorporated in England and Wales and has the same registered office as the Company. These audited consolidated financial statements set out in this report covers the year to 30 June 2019, with comparative figures relating to the period from incorporation to June 2018, and includes the results and net assets of the Group. The financial information contained in this announcement has been prepared on the basis of the accounting policies set out in the financial statements for the year ended 30 June 2019. Whilst the financial information included in this announcement has been computed in accordance with IFRS, as adopted by the European Union, this announcement does not itself contain sufficient information to comply with IFRS. The financial information does not constitute the Group’s financial statements for the years ended 30 June 2019 or 30 June 2018, but is derived from those financial statements. Those financial statements give a true and fair view of the assets, liabilities, financial position and results of the Group. Financial statements for the year ended 30 June 2018 have been delivered to the Registrar of Companies and those for the year ended 30 June 2019 will be delivered following the Company’s AGM. The auditors’ reports on both the 30 June 2019 and 30 June 2018 financial statements were unqualified; did not draw attention to any matters by way of emphasis; and did not contain statements under section 498 (2) or (3) of the Companies Act 2006. The Consolidated financial information has been prepared in accordance with: • International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) as adopted by the European Union; • The Disclosure and Transparency Rules of the Financial Conduct Authority; and • The Companies Act 2006, as applicable to companies reporting under IFRS. Accounting convention and currency The audited consolidated financial statements (the “financial statements”) have been prepared on a historical cost basis, except that investment properties and interest rate derivatives are measured at fair value. The financial statements are presented in Pounds Sterling and all values are rounded to the nearest thousand (£000), except where otherwise indicated. Pounds Sterling is the functional currency of the Company and the presentation currency of the Group. Going concern In assessing the going concern basis of accounting the Directors have had regard to the guidance issued by the Financial Reporting Council. During the period covered by this report, the Group has raised a total of £56.3 million from the issue of equity shares and a further £52.1 million under the Bayerische Landesbank credit facility referred to in note 17. All financial covenants have been met to date. During August 2019 the Group entered into a £47.6 million credit facility with Deka Bank and acquired a further investment property for £54.4 million plus acquisition costs. Further details are set out in note 25. The Group generated net cash flow from operating activities in the period of £13.9 million, with its cash balances at 30 June 2019 totalling £9.9 million and the Group having no capital commitments or contingent liabilities as at that date. The Group benefits from a secure income stream from its property assets that are let to tenants with excellent covenant strength under long leases that are subject to upward only RPI rent reviews. As a result, the Directors believe that the Group is well placed to manage its financing and other business risks and that the Group will remain viable, continuing to operate and meet its liabilities as they fall due. The Directors are therefore of the opinion that the going concern basis adopted in the preparation of the financial statements is appropriate. 5 4 S U P E R M A R K E T I N C O M E R E I T P LC New standards, interpretations and amendments During the year, the Group has adopted IFRS 9 “Financial instruments” and IFRS 15 “Revenue from contracts with customers”. IFRS 9 deals with the classification and measurement of financial instruments and includes a requirement to apply an expected credit loss approach to the impairment of short term financial assets such as rent receivables, but its adoption has not had a material impact on the Group’s financial statements other than certain additional disclosures in respect of hedging which are included in note 18. On initial application of IFRS 9 the Group has elected to continue applying the hedge accounting requirements of IAS 39 in respect of the Group’s interest rate derivatives, and this election applies to all of the Group’s hedging relationships. The Group’s revenue is derived entirely from leases which are outside the scope of IFRS 15, therefore its adoption has not had any material impact on the Group’s financial statements. The Group has also adopted the amendments to IAS 40 “Investment Property”, which clarify when a disposal of investment property should be recognised in line with the revenue recognition criteria of IFRS 15. The Group has not yet disposed of any investment properties, nor is there an intention to dispose of any assets, therefore the adoption of IAS 40 has not had any impact on the Group’s financial statements. None of the other new or amended standards or interpretations issued by the International Accounting Standards Board (“IASB”) or the IFRS Interpretations Committee (“IFRIC”) have led to any material changes in the Group’s accounting policies or disclosures during the year. Standards and interpretations in issue not yet adopted The IASB has issued IFRS 16 “Leases”, which is effective from 1 January 2019 and has not been adopted early. Since IFRS 16 will not result in significant changes of accounting policies for lessors, the Directors’ assessment of its impact remains unchanged from that reported in the 2018 financial statements, where it was noted that it was not expected to have a material impact on the Group’s financial statements as there are no significant headlease rents on the group’s long leasehold properties. 2. Significant accounting judgements, estimates and assumptions The IASB and IFRIC have also issued or revised IFRS 3, IFRS 9, IFRS 10, IFRS 11, IFRS 14, IFRS 17, IAS 1, IAS 8, IAS 12, IAS 19, IAS 23, IAS 28 and IFRIC 23, but these are not expected to have a material effect on the operations of the Group. In the application of the Group’s accounting policies, which are summarised in note 3, the Directors are required to make judgements, estimates and assumptions that affect the reported amounts recognised in the financial statements and the disclosures therein. The judgements, estimates and assumptions that the Directors consider have a significant risk of causing a material adjustment to the carrying amounts of the Group’s assets and liabilities within the next 12 months are outlined below. Key estimate: Fair value of investment properties The valuation of the Group’s investment properties is at fair value, which is determined by the Group’s independent valuer on the basis of market value in accordance with the RICS Valuation – Global Standards (the ‘Red Book’). Recognised valuation techniques are used by the independent valuer which are in accordance with those recommended by the International Valuation Standard Committee and compliant with IFRS 13 “Fair Value Measurement.” The independent valuer is considered to have sufficient current local and national knowledge of the supermarket property market and the requisite skills and understanding to undertake the valuation competently. In forming an opinion as to fair value, the independent valuer makes a series of assumptions, which are typically market-related, such as those in relation to net initial yields and expected rental values. These are based on the independent valuer’s professional judgement. Other factors taken into account by the independent valuer in arriving at the valuation of the Group’s investment properties include the length of property leases, the location of the properties and the strength of tenant covenants. The fair value of the Group’s investment properties as determined by the independent valuer, along with the significant methods and assumptions used in estimating this fair value, are set out in note 12. A N N U A L R E P O R T 2 0 1 9 5 5 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 2. Significant accounting judgements, estimates and assumptions continued Key judgement: Acquisition of investment properties The Group has acquired and intends to acquire further investment properties. At the time of each purchase the Directors assess whether an acquisition represents the acquisition of an asset or the acquisition of a business. To date all acquisitions of properties have been direct asset purchases. The Group may in the future acquire entities that own property assets. These acquisitions would be accounted for as a business combination only if an integrated set of activities were to be acquired in addition to the property. In the situations where such an acquisition was not being judged to be an acquisition of a business, the Group would not treat it as a business combination. Rather, the cost to acquire the entity concerned would be allocated between the identifiable assets and liabilities of the entity based upon their relative fair values at the acquisition date. Accordingly, no goodwill or additional deferred taxation would arise from such an acquisition. Key judgement: Operating lease contracts – the Group as lessor The Group has acquired investment properties that are subject to commercial property leases with tenants. The Directors have concluded, based on an evaluation of the terms and conditions of the arrangements, in particular the duration of the lease terms and the minimum lease payments, that the Group retains all the significant risks and rewards of ownership of the properties acquired to date and so has accounted for these leases as operating leases rather than finance leases. Such considerations are required each time that the Group acquires a new property. 3. Summary of significant accounting policies The principal accounting policies applied in the preparation of the consolidated financial statements are set out below. 3.1 Basis of consolidation The consolidated financial statements comprise the financial statements of the Company and all of its subsidiaries drawn up to 30 June 2019. Subsidiaries are those entities including special purpose entities, directly or indirectly controlled by the Company. Control exists when the Company is exposed or has rights to variable returns from its investment with the investee and has the ability to affect those returns through its power over the investee. In assessing control, potential voting rights that presently are exercisable are taken into account. The financial statements of subsidiaries are included in the consolidated financial information from the date that control commences until the date that control ceases. In preparing the consolidated financial information, intra group balances, transactions and unrealised gains or losses are eliminated in full. Uniform accounting policies are adopted for all companies within the Group. 3.2 Segmental information The Directors are of the opinion that the Group is currently engaged in a single segment business, being investment in United Kingdom in supermarket property assets. 3.3 Rental income Rental income arising on investment properties is accounted for in profit or loss on a straight-line basis over the lease term, as adjusted for the following: • Any rental income from fixed and minimum guaranteed rent review uplifts is recognised on a straight-line basis over the shorter of the term to lease expiry or to the first tenant break option; • Lease incentives are spread evenly over the lease term, even if payments are not made on such a basis. The lease term is the non-cancellable period of the lease together with any further term for which the tenant has the option to continue the lease, where, at the inception of the lease, the Directors are reasonably certain that the tenant will exercise that option. Contingent rents, such as those arising from indexed-linked rent uplifts or market-based rent reviews, are recognised in the period in which they are earned. Where income is recognised in advance of the related cash flows due to fixed and minimum guaranteed rent review uplifts or lease incentives, an adjustment is made to ensure that the carrying value of the relevant property, including the accrued rent relating to such uplifts or lease incentives, does not exceed the external valuation. 5 6 S U P E R M A R K E T I N C O M E R E I T P LC Rental income is invoiced in advance with that element of invoiced rental income that relates to a future period being included within deferred rental income in the consolidated statement of financial position. 3.4 Finance expense Finance expenses consist principally of interest payable and the amortisation of loan arrangement fees. Loan arrangement fees are expensed using the effective interest method over the term of the relevant loan. Interest payable and other finance costs, including commitment fees, which the Group incurs in connection with bank borrowings, are expensed in the period to which they relate. 3.5 Administrative and other expenses Administrative and other expenses, including the investment advisory fees payable to the Investment Adviser, are recognised in profit and loss on an accruals basis. 3.6 Dividends payable to shareholders Dividends to the Company’s shareholders are recognised when they become legally payable, as a reduction in equity in the financial statements. Interim equity dividends are recognised when paid. Final equity dividends will be recognised when approved by shareholders at an AGM. 3.7 Taxation Non-REIT taxable income Taxation on the Group’s profit or loss for the period that is not exempt from tax under the UK-REIT regulations comprises current and deferred tax, as applicable. Tax is recognised in profit or loss except to the extent that it relates to items recognised as direct movements in equity, in which case it is similarly recognised as a direct movement in equity. Current tax is tax payable on any non-REIT taxable income for the period, using tax rates enacted or substantively enacted at the end of the relevant period. Entry to the UK-REIT regime The Group obtained its UK-REIT status effective from 21 December 2017. Entry to the regime results in, subject to continuing relevant UK-REIT criteria being met, the profits of the Group’s property rental business, comprising both income and capital gains, being exempt from UK taxation. The Group intends to ensure that it complies with the UK-REIT regulations on an on-going basis and regularly monitors the conditions required to maintain REIT status. 3.8 Investment properties Investment properties consist of land and buildings (all supermarkets) which are held to earn income together with the potential for capital growth. Investment properties are recognised when the risks and rewards of ownership have been transferred and are measured initially at cost, being the fair value of the consideration given, including transaction costs. Where the purchase price (or proportion thereof) of an investment property is settled through the issue of new ordinary shares in the company, the number of shares issued is such that the fair value of the share consideration is equal to the fair value of the asset being acquired. Transaction costs include transfer taxes and professional fees for legal services. Any subsequent capital expenditure incurred in improving investment properties is capitalised in the period incurred and included within the book cost of the property. All other property expenditure is written off in profit and loss as incurred. After initial recognition, investment properties are measured at fair value, with gains and losses recognised in profit and loss in the period in which they arise. Gains and losses on disposals of investment properties will be determined as the difference between the net disposal proceeds and the carrying value of the relevant asset. These will be recognised in profit and loss in the period in which they arise. 3.9 Financial assets and liabilities Financial assets and liabilities are recognised when the relevant Group entity becomes a party to the unconditional contractual terms of an instrument. Unless otherwise indicated, the carrying amounts of financial assets and liabilities are considered by the Directors to be reasonable estimates of their fair values. A N N U A L R E P O R T 2 0 1 9 5 7 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 3. Summary of significant accounting policies continued Financial assets Financial assets are recognised initially at their fair value. All of the Group’s financial assets, except interest rate derivatives, are held at amortised cost using the effective interest method, less any impairment. Cash and cash equivalents Cash and cash equivalents consist of cash in hand and short-term deposits in banks with an original maturity of three months or less. Trade and other receivables Trade and other receivables, including rents receivable, are recognised and carried at the lower of their original invoiced value and recoverable amount. Provisions for impairment are calculated using an expected credit loss model. Balances will be written-off in profit or loss in circumstances where the probability of recovery is assessed as being remote. Trade and other payables Trade and other payables are recognised initially at their fair value and subsequently at amortised cost. Bank borrowings Bank borrowings are initially recognised at fair value net of attributable transaction costs. After initial recognition, bank borrowings are subsequently measured at amortised cost, using the effective interest method. The effective interest rate is calculated to include all associated transaction costs. Derivative financial instruments and hedge accounting The Group’s derivative financial instruments currently comprise an interest rate cap and interest rate swap. Both are designated as hedging instruments for which hedge accounting is being applied. These instruments are used to manage the Group’s cash flow interest rate risk. The instruments are initially recognised at fair value on the date that the derivative contract is entered into, being the cost of any premium paid at inception, and are subsequently re-measured at their fair value at each reporting date. Fair value measurement of derivative financial instruments The fair value of derivative financial instruments is the estimated amount that the Group would receive or pay to terminate the agreement at the period end date, taking into account current interest rate expectations and the current credit rating of the relevant group entity and its counterparties. The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data is available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs significant to the fair value measurement as a whole. A number of assumptions are used in determining the fair values including estimations over future interest rates and therefore future cash flows. The fair value represents the net present value of the difference between the cash flows produced by the contract rate and the valuation rate. Hedge accounting At the inception of a hedging transaction, the Group documents the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking the hedging transaction. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. Assuming the criteria for applying hedge accounting continue to be met the effective portion of gains and losses on the revaluation of such instruments are recognised in other comprehensive income and accumulated in the cash flow hedging reserve. Any ineffective portion of such gains and losses will be recognised in profit or loss within finance income or expense as appropriate. The cumulative gain or loss recognised in other comprehensive income is reclassified from the cash flow hedge reserve to profit or loss (finance expense) at the same time as the related hedged interest expense is recognised. 5 8 S U P E R M A R K E T I N C O M E R E I T P LC 3.10 Equity instruments Equity instruments issued by the Company are recorded at the amount of the proceeds received, net of directly attributable issue costs. Costs not directly attributable to the issue are immediately expensed in profit or loss. Further details of the accounting for the proceeds from the issue of shares in the period are disclosed in note 19. 3.11 Fair value measurements and hierarchy Fair value is the price that would be received on the sale of an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction takes place either in the principal market for the asset or liability, or in the absence of a principal market, in the most advantageous market. It is based on the assumptions that market participants would use when pricing the asset or liability, assuming they act in their economic best interest. A fair value measurement of a non-financial asset takes into account the best and highest value use for that asset. The fair value hierarchy to be applied under IFRS 13 is as follows: Level 1: Quoted (unadjusted) market prices in active markets for identical assets or liabilities. Level 2: Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable. Level 3: Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable. For assets and liabilities that are carried at fair value and which will be recorded in the financial information on a recurring basis, the Group will determine whether transfers have occurred between levels in the hierarchy by reassessing categorisation at the end of each reporting period. 3.12 Occupational leases The Directors exercise judgement in considering the potential transfer of the risks and rewards of ownership in accordance with IAS 17 “Leases” for all occupational leases and head leases and determine whether such leases are operating leases. A lease is classified as a finance lease if substantially all of the risks and rewards of ownership transfer to the lessee. If the Group substantially retains those risks, a lease is classified as an operating lease. All occupational leases reflected in these financial statements are classified as operating leases. 4. Rental income Rental income – freehold property Rental income – long leasehold property Total rental income Insurance/service charge income Insurance/service charge expense Total rental income 1 July 2018 to 30 June 2019 £000 1 June 2017 to 30 June 2018 £000 3,510 5,432 8,942 4,280 12,951 17,231 163 – (163) – 17,231 8,942 Included within rental income is a £366,000 (2018: £328,000) rent smoothing adjustment that arises as a result of IAS 17 ‘Leases’ requiring that rental income in respect of leases with rents increasing by a fixed percentage to be accounted for on straight-line basis over the lease term. During the period this resulted in an increase in rental income and an offsetting entry being recognised in profit or loss as an adjustment to the investment property revaluation. On an annualised basis, rental income comprises £10,500,000 (2018: £5,432,000) relating to the Group’s largest tenant, £4,280,029 (2018: £3,510,000) relating to the Group’s second-largest tenant and £2,452,000 (2018: nil) relating to the Group’s third-largest tenant. A N N U A L R E P O R T 2 0 1 9 5 9 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 5. Administrative and other expenses Investment Adviser fees (Note 24) Directors’ remuneration (Note 7) Corporate administration fees Legal and professional fees Other administrative expenses Total administrative and other expenses 1 July 2018 to 30 June 2019 £000 1 June 2017 to 30 June 2018 £000 1,814 145 372 396 361 3,088 1,079 160 216 297 345 2,097 The fees relating to the issue of shares in the period have been treated as share issue expenses and offset against the share premium reserve. 6. Operating profit Operating profit is stated after charging fees for: Audit of the Company’s consolidated and individual financial statements Audit of subsidiaries, pursuant to legislation Total audit services Audit related services: audit of the Historical Financial Information for the period ended 31 December 2017 for inclusion in the April 2018 Prospectus Audit related services: interim review Audit related services: audit of the Company’s initial financial information to 18 September 2017 Total audit and audit related services 1 July 2018 to 30 June 2019 £000 1 June 2017 to 30 June 2018 £000 74 21 95 – 25 – 55 15 70 55 20 10 120 155 The Group’s auditor also provided the following services in relation to the placing of share capital and the fees for which have been recognised within equity as a deduction from share premium: Other non-audit services: corporate finance services in connection with the July 2017 & May 2018 placing Other non-audit services: corporate finance services in connection with the March 2019 placing Total other non-audit services Total fees charged by the Group’s auditor 1 July 2018 to 30 June 2019 £000 1 June 2017 to 30 June 2018 £000 – 30 – 30 150 70 70 225 The other non-audit services charged to income in the current period relate to work as Reporting Accountants in connection with the share placing in March 2018. The audit-related services are as described above. 6 0 S U P E R M A R K E T I N C O M E R E I T P LC 7. Directors’ remuneration The Group had no employees in the current period. The Directors, who are the key management personnel of the Company, are appointed under letters of appointment for services. Directors’ remuneration, all of which represents fees for services provided, was as follows: Directors’ fees Employer’s National Insurance Contribution Total Directors’ remuneration The highest paid director received £55,000 (2018: £60,000) for services during the year. 8. Finance expense Interest payable on bank borrowings and hedging arrangements Fair value adjustment of interest rate derivatives (note 16) Commitment fees payable Amortisation of loan arrangement fees Amortisation of interest rate derivative premium (note 16) Total finance expense 1 July 2018 to 30 June 2019 £000 1 June 2017 to 30 June 2018 £000 134 12 146 142 18 160 1 July 2018 to 30 June 2019 £000 1 June 2017 to 30 June 2018 £000 3,334 1,495 252 – 47 492 54 99 284 39 4,180 1,917 The above finance expense include the following in respect of liabilities not classified as fair value through profit and loss Total interest expense on financial liabilities held at amortised cost Fee expense not part of effective interest rate for financial liabilities held at amortised cost Total finance expense 9. Taxation A) Tax charge in profit or loss UK corporation tax 1 July 2018 to 30 June 2019 £000 1 June 2017 to 30 June 2018 £000 3,827 47 3,873 1,779 99 1,878 1 July 2018 to 30 June 2019 £000 1 June 2017 to 30 June 2018 £000 18 227 The Company and its subsidiaries operate as a UK Group REIT. Subject to continuing compliance with certain rules, the UK REIT regime exempts the profits of the Group’s property rental business from UK corporation tax. To operate as a UK Group REIT a number of conditions had to be satisfied in respect of the Company, the Group’s qualifying activity and the Group’s balance of business. Since the 21 December 2017 the Group has met all such applicable conditions. In the intervening period from incorporation of the Company on 1 June 2017 to 21 December 2017 the Group was subject to UK corporation tax on its property rental business at an effective rate of 19%, resulting in the above tax liability. A N N U A L R E P O R T 2 0 1 9 6 1 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 9. Taxation continued The reconciliation of the profit before tax multiplied by the standard rate of corporation tax for the period of 19% to the total tax charge is as follows: B) Reconciliation of the tax charge for the year/period Profit on ordinary activities before taxation Theoretical tax at UK standard corporation tax rate of 19% Effects of: Investment property revaluation not taxable REIT exempt income Adjustments in respect of prior period Tax charge for the year/period 10. Earnings per share 1 July 2018 to 30 June 2019 £000 1 June 2017 to 30 June 2018 £000 10,610 2,016 (123) (1,893) 18 – 847 160 776 (709) 18 227 Earnings per share (EPS) amounts are calculated by dividing the profit or loss for the year/period attributable to ordinary equity holders of the Company by the weighted average number of ordinary shares in issue during the period. As there are no dilutive instruments outstanding, basic and diluted earnings per share are identical. The European Public Real Estate Association (“EPRA”) publishes guidelines for calculating adjusted earnings on a comparable basis. EPRA EPS is a measure of EPS designed by EPRA to enable entities to present underlying earnings from core operating activities, which excludes fair value movements on investment properties. The calculation of basic, diluted and EPRA EPS is as follows: Net profit attributable to ordinary shareholders £000 Weighted average number of ordinary shares1 Number Earnings per share Pence 10,593 198,087,482 5.3p (647) – 9,946 198,087,482 (0.3)p 5.0p Net profit attributable to ordinary shareholders £000 Weighted average number of ordinary shares1 Number 620 124,235,902 4,081 – 4,701 124,235,902 Earnings per share Pence 0.5p 3.3p 3.8p For the period from 1 July 2018 to 30 June 2019 Basic and diluted EPS Adjustments to remove: Changes in fair value of investment properties EPRA EPS For the period from 1 June 2017 to 30 June 2018 Basic and diluted EPS Adjustments to remove: Changes in fair value of investment properties EPRA EPS 1 Based on the weighted average number of ordinary shares in issue. 6 2 S U P E R M A R K E T I N C O M E R E I T P LC 11. Dividends Amounts recognised as a distribution to ordinary shareholders in the year/period: Dividends paid 1 July 2018 to 30 June 2019 £000 1 June 2017 to 30 June 2018 £000 10,934 4,675 On 18 July 2018, the Board declared a Q4 interim dividend of 1.375 pence per share, which was paid on 23 August 2018 to shareholders on the register on 26 July 2018. On 8 October 2018, the Board declared a Q1 interim dividend of 1.375 pence per share, which was paid on 6 November 2018 to shareholders on the register on 19 October 2018. On 8 January 2019, the Board declared a Q2 interim dividend of 1.419 pence per share, which was paid on 8 February 2019 to shareholders on the register on 18 January 2019. On 8 April 2019, the Board declared a Q3 interim dividend of 1.419 pence per share, which was paid on 7 May 2019 to shareholders on the register on 23 April 2019. On 8 July 2019, the Board declared a Q4 interim dividend of 1.419 pence per share, which was paid on 7 August 2019 to shareholders on the register on 19 July 2019. This has not been included as a liability as at 30 June 2019. 12. Investment properties In accordance with IAS 40 “Investment Property”, the Group’s investment properties have been independently valued at fair value by Cushman & Wakefield, an accredited independent valuer with a recognised and relevant professional qualification and with recent experience in the locations and categories of the investment properties being valued. The valuations have been prepared in accordance with the RICS Valuation – Global Standards (the “Red Book”) and incorporate the recommendations of the International Valuation Standards Committee, which are consistent with the principles set out in IFRS 13. The independent valuer in forming its opinion on valuation makes a series of assumptions. As explained in note 2, all the valuations of the Group’s investment property at 30 June 2019 are classified as ‘level 3’ in the fair value hierarchy defined in IFRS 13. The valuations are ultimately the responsibility of the Directors. Accordingly, the critical assumptions used in establishing the independent valuation are reviewed by the Board. At 1 July 2018 Property additions Capitalised acquisition costs Revaluation movement Valuation at 30 June 2019 Freehold £000 83,350 – – 1,100 Long Leasehold £000 181,550 96,700 5,617 (87) Total £000 264,900 96,700 5,617 1,013 84,450 283,780 368,230 A N N U A L R E P O R T 2 0 1 9 6 3 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 12. Investment properties continued At 1 June 2017 Property additions Capitalised acquisition costs Revaluation movement Valuation at 30 June 2018 Freehold £000 – 79,885 4,462 (997) Long Leasehold £000 – 174,655 9,651 (2,756) Total £000 – 254,540 14,113 (3,753) 83,350 181,550 264,900 All property acquisitions in the period were direct asset acquisitions. One Property acquisition during the year was part paid in non-cash consideration totaling £11.3 million. Of the six properties held under long leaseholds, one has 120 years unexpired on the headlease, one has 160 years with the option to extend and option to acquire, three have 987 years unexpired and one has 990 year unexpired. The Group has no material liabilities in respect of these headleases. Included within the carrying value of investment properties at 30 June 2019 is £694,000 (2018: £328,000) in respect of the smoothing of fixed contractual rent uplifts as described in note 4. The difference between rents on a straight-line basis and rents actually receivable is included within the carrying value of the investment properties but does not increase that carrying value over fair value. The effect of this adjustment on the revaluation movement for the period is as follows: Revaluation movement per above Rent smoothing adjustment (note 4) Change in fair value recognised in profit or loss Valuation techniques and key unobservable inputs 1 July 2018 to 30 June 2019 £000 1 June 2017 to 30 June 2018 £000 1,013 (366) 647 (3,753) (328) (4,081) Valuation techniques used to derive fair values The valuations have been prepared on the basis of market value which is defined in the RICS Valuation Standards as ‘the estimated amount for which an asset or liability should exchange on the date of the valuation between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion’. Market value as defined in the RICS Valuation Standards is the equivalent of fair value under IFRS. Unobservable inputs These include but are not limited to: the estimated rental value (“ERV”) based on market conditions prevailing at the valuation date; the future rental growth - the estimated average increase in rent based on both market estimations and contractual situations; the equivalent yield (defined as the weighted average of the net initial yield and reversionary yield); and the physical condition of the individual properties determined by inspection. A decrease in ERV would decrease the fair value. A decrease in the equivalent yield would increase the fair value. Sensitivity of measurement of significant unobservable inputs As described in note 2 to the financial information the determination of the valuation of the Group’s investment property portfolio is open to judgements and is inherently subjective by nature. Sensitivity analysis – impact of changes in initial yields and passing rent Initial yields of the Group’s investment properties at 30 June 2018 range from 4.36% to 5.70%. A 0.25% shift of the initial yield on all the Group’s investment properties would have an approximate £18.1 million (2018: £13.1 million) impact on the total valuation of the properties. A 1% movement in the passing rents across all the Group’s investment properties would have approximately a £3.7 million (2018: £2.6 million) impact on the total valuation of the properties. 6 4 S U P E R M A R K E T I N C O M E R E I T P LC 13. Subsidiaries The companies listed in the following table were the subsidiary undertakings of the Company at 30 June 2019 all of which are wholly owned. All subsidiary undertakings are incorporated in England with their registered office at 7th floor, 9 Berkeley Street, London, W1J 8DW. Company name Type of holding Nature of business Supermarket Income Investments UK Limited Supermarket Income Investments (Midco2) UK Limited Supermarket Income Investments (Midco3) UK* Limited Supermarket Income Investments UK (NO1) Limited Supermarket Income Investments UK (NO2) Limited Supermarket Income Investments UK (NO3) Limited Supermarket Income Investments UK (NO4) Limited Supermarket Income Investments UK (NO5) Limited Supermarket Income Investments UK (NO6) Limited Supermarket Income Investments UK (NO7) Limited* * New subsidiaries incorporated during the year ended 30 June 2019. Direct Direct Direct Indirect Indirect Indirect Indirect Indirect Indirect Indirect 14. Trade and other receivables Intermediate parent company Intermediate parent company Intermediate parent company Property investment Property investment Property investment Property investment Property investment Property investment Property investment Other receivables Prepayments and accrued income Total trade and other receivables As at 30 June 2019 £000 As at 30 June 2018 £000 3,503 17 3,521 29 1,006 1,035 All trade receivables relate to amounts that are less than 30 days overdue as at the period end date. Included within other receivables is £3,315,000 of rental receipts held by the group’s managing agents as at 30 June 2019. These amounts are held within ring-fenced client trust accounts by the managing agent before being transferred to the group and therefore there is not deemed to be any material credit risk in relation to these receivables. 15. Trade and other payables Corporate accruals VAT payable Total trade and other payables As at 30 June 2019 £000 As at 30 June 2018 £000 1,828 742 2,570 1,132 341 1,473 All trade and other payables relate to amounts that are less than 30 days overdue at the period end date. 16. Interest rate derivatives Non-current asset: Interest rate cap Non-current liability: Interest rate cap Non-current liability: Interest rate derivative As at 30 June 2019 £000 As at 30 June 2018 £000 – (18) (1,095) 37 – – The interest rate cap is remeasured to fair value by the counterparty bank on a quarterly basis. A N N U A L R E P O R T 2 0 1 9 6 5 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 16. Interest rate derivatives continued The fair value at the end of period comprises: At start of period Interest rate cap premium paid on inception Amortisation of cap premium in the period (note 8) Changes in fair value of interest rate derivative in the period Charge to the Income Statement (note 8) Fair Value as at 30 June 2019 £000 £’ 000 37 26 (55) (1,374) 253 (1,113) – 158 (39) (82) – 37 To partially mitigate the interest rate risk that arises as a result of entering into the debt facilities referred to in note 17, the Group has entered into a derivative interest rate cap (‘the cap’) and a derivative interest rate swap (‘the swap’). The total notional value of the cap was £63.5 million with its term coinciding with the expiry of the term of the HSBC credit facility. The strike rate of the cap as at 30 June 2019 was 1.75%. which caps the Group’s cost of borrowing at 3.35% on the hedged notional amount. The total notional value of the swap was £52.1 million with its term coinciding with the maturity of the Bayerische Landesbank loan facility. The fixed interest rate of the swap as at 30 June 2019 was 1.305%. The Group uses all of its interest rate derivatives in risk management as cash flow hedges to protect against movements in future interest cash flows on secured loans which bear interest at variable rates. The Group enters into interest rate swaps that have similar critical terms as the hedged item, such as reference rate, reset dates, payment dates, maturities and notional amount. Since all critical terms matched during the year, the economic relationship was 100% effective. There was no ineffectiveness during the year ending June 2019 or period ending June 2018 in relation to the interest rate swaps. The derivatives have been valued in accordance with IFRS 13 by reference to interbank bid market rates as at the close of business on the last working day prior to each balance sheet date. The fair values are calculated using the present values of future cash flows, based on market forecasts of interest rates and adjusted for the credit risk of the counterparties. The amounts and timing of future cash flows are projected on the basis of the contractual terms. All interest rate derivatives are classified as level 2 in the fair value hierarchy as defined in IFRS 13 and there were no transfers to or from other levels of the fair value hierarchy during the year. The entire £52.1 million notional amount of the interest rate swaps and £63.5 million of the notional amount of the interest rate caps are used to hedge cash flow interest rate risk on £115.6 million of the floating rate loans described in note 17 and they have been wholly designated for hedge accounting. The hedges are expected to be 100% effective throughout their lives. 80% of the Group’s total drawn debt was hedged as at 30 June 2019 (2018: 72%) It is the Group’s target to hedge at least 60% of the Group’s total debt at any time using interest rate derivatives. In accordance with the Group’s treasury risk policy, the Group applies cash flow hedge accounting in partially hedging the interest rate risks arising on its variable rate linked loans. Changes in the fair values of derivatives that are designated as cash flow hedges and are effective are recognised directly in the cash flow hedge reserve and included in other comprehensive income. Any ineffectiveness that may arise in this hedge relationship will be included in profit or loss. 6 6 S U P E R M A R K E T I N C O M E R E I T P LC 17. Bank borrowings Amounts falling due after more than one year: Secured debt Less: Unamortised finance costs Bank borrowings per the consolidated statement of financial position As at 30 June 2019 £000 As at 30 June 2018 £000 144,894 (1,186) 88,844 (745) 143,708 88,099 Secured debt comprises a revolving credit facility (the ‘credit facility’) of £100 million with HSBC Bank Plc and a five year interest-only loan facility (the ‘loan facility’) of £52.1 million with Bayerische Landesbank. The credit facility is secured on four Tesco assets (Thetford, Bristol, Cumbernauld and Scunthorpe) and the loan facility is secured on Sainbury’s, Ashford and Morrisons, Sheffield. During June 2019 the Group exercised a 12-month extension on the credit facility from 30 August 2020 to 30 August 2021. The original terms of the credit facility are unchanged, and the facility contains one further 12-month extension option to August 2022. The extension option requires the agreement of both the Group and counterparty bank in order to exercise. At June 2019, £92.8 million has been drawn down in total under the credit facility. All the advances drawn under the credit facility have an interest charge which is payable quarterly based on a margin above three-month LIBOR. The margin payable by the Group on the credit facility as at 30 June 2019 was 160 basis points above three-month LIBOR. As at 30 June 2019, the full amount of the loan facility had been drawn down. Interest is payable quarterly on the loan facility based on a margin of 125 basis points above three-month LIBOR. The fixed interest rate on the loan facility resulting from the Interest rate swap was 2.55%. Both facilities have loan covenants of 60% LTV and 200% interest cover. There have been no defaults or breaches of any loan covenants during the current or any prior period. Any associated fees in arranging the bank borrowings that are unamortised as at the end of the period are offset against amounts drawn under the facility as shown in the table above. The debt is secured by charges over the Group’s investment properties and by charges over the shares of certain group companies, not including the Company itself. There have been no defaults or breaches of any loan covenants during the current or any prior period. A new £47.6 million loan facility was subsequently entered into with Deka Bank in August 2018. Full details are set out in note 25. 18. Categories of financial instruments Financial assets Financial assets at amortised costs: Cash and cash equivalents Trade and other receivables Derivatives in effective hedges: Interest rate derivative Total Financial Assets Financial liabilities Financial liabilities at amortised cost: Secured debt Trade and other payables Derivatives in effective hedges: Interest rate derivative Total Financial Liabilities As at 30 June 2019 £000 As at 30 June 2018 £000 9,898 3,503 – 13,401 2,239 1,035 37 3,311 143,708 1,828 88,099 1,132 1,113 – 146,649 89,231 A N N U A L R E P O R T 2 0 1 9 6 7 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 18. Categories of financial instruments At the balance sheet date, all financial assets and liabilities were measured at amortised cost except for the interest rate derivative which is measured at fair value. The interest rate derivative valuation is classified as ‘level 2’ in the fair value hierarchy as defined in IFRS 13 and its fair value was calculated using the present values of future cash flows, based on market forecasts of interest rates and adjusted for the credit risk of the counterparties. Financial risk management Through the Group’s operations and use of debt financing it is exposed to certain risks. The Group’s financial risk management objective is to minimise the effect of these risks, for example by using an interest rate cap and interest rate swap derivative to partially mitigate exposure to fluctuations in interest rates, as described in note 16. The exposure to each financial risk considered potentially material to the Group, how it arises and the policy for managing it is summarised below. Market risk Market risk is defined as the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. The Group’s market risk arises from open positions in interest bearing assets and liabilities, to the extent that these are exposed to general and specific market movements. The Group’s interest-bearing financial instruments comprise cash and cash equivalents and bank borrowings. Changes in market interest rates therefore affect the Group’s finance income and costs, although the Group has purchased interest rate derivatives as described in note 16 in order to partially mitigate the risk in respect of finance costs. The Group’s sensitivity to changes in interest rates, calculated on the basis of a ten-basis point increase or decrease in closing three-month LIBOR, was as follows: Effect on profit for the current period Effect on other comprehensive income and equity 1 July 2018 to 30 June 2019 £000 1 June 2017 to 30 June 2018 £000 142 (211) 70 7 Trade and other receivables and payables are interest free as long as they are paid in accordance with their terms, and have payment terms of less than one year, so it is assumed that there is no material interest rate risk associated with these financial instruments. The Group prepares its financial information in Sterling and all of its current operations are Sterling denominated. It therefore has no exposure to foreign currency and does not have any direct sensitivity to changes in foreign currency exchange rates. Credit risk Credit risk is the risk of financial loss to the Group if a counterparty fails to meet its contractual obligations. The principal counterparties are the Group’s tenants (in respect of rent receivables arising under operating leases) and banks (as holders of the Group’s cash deposits). The credit risk of rent receivables is considered low because the counterparties to the operating leases are considered by the Board to be high quality tenants and any lease guarantors are of appropriate financial strength. Rent collection dates and statistics are monitored to identify any problems at any early stage, and if necessary rigorous credit control procedures will be applied to facilitate the recovery of rent receivables. The Group does not hold any financial assets which are either past due or impaired. The credit risk on cash deposits is limited because the counterparties are banks with credit ratings which are acceptable to the Board and are kept under review each quarter. Liquidity risk Liquidity risk arises from the Group’s management of working capital and the finance costs and principal repayments on its secured debt. It is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group seeks to manage its liquidity risk by ensuring that sufficient cash is available to meet its foreseeable needs. These liquidity needs are relatively modest and are capable of being satisfied by the surplus available after rental receipts have been applied in payment of interest as required by the credit agreement relating to the Group’s secured debt. 6 8 S U P E R M A R K E T I N C O M E R E I T P LC Before entering into any financing arrangements, the Board assesses the resources that are expected to be available to the Group to meet its liabilities when they fall due. These assessments are made on the basis of both base case and downside scenarios. The Group prepares detailed management accounts which are reviewed by the Board at least quarterly to assess ongoing liquidity requirements and compliance with loan covenants. The Board also keeps under review the maturity profile of the Group’s cash deposits in order to have reasonable assurance that cash will be available for the settlement of liabilities when they fall due. Inflation risk arises from the impact of inflation on the Group’s income and expenditure. All of the Group’s passing rent at 30 June 2019 is subject to inflation linked rent reviews. Consequently, the Group is exposed to movements in the Retail Prices Index (“RPI”), which is the relevant inflation benchmark. However, all RPI-linked rent review provisions provide that rents will only be subject to upwards review and never downwards. As a result, the Group is not exposed to a fall in rent in deflationary conditions. The following table shows the maturity analysis for financial assets and liabilities. The table has been drawn up based on the undiscounted cash flows of non-derivative financial instruments, including future interest payments, based on the earliest date on which the Group can be required to pay and assuming that three-month LIBOR remains at the 30 June 2019 rate. Interest rate derivatives are shown at fair value and not at their gross undiscounted amounts. As at 30 June 2019 Financial assets: Cash and cash equivalents Trade and other receivables Total Financial assets Financial liabilities: Bank borrowings Trade payables and other payables Interest rate derivatives Total Financial liabilities As at 30 June 2018 Financial assets: Cash and cash equivalents Trade and other receivables Fair value through profit and loss Total Financial assets Financial liabilities: Bank borrowings Trade payables and other payables Total Financial liabilities Less than one year £000 One to two years £000 Two to five years £000 More than five years £000 9,898 3,503 13,401 3,626 1,828 – 5,454 – – – – – – 7,251 – – 7,251 148,084 – 1,113 149,197 – – – – – – – Less than one year £000 One to two years £000 Two to five years £000 More than five years £000 2,239 1,016 – 3,274 2,200 1,132 3,332 – – – – – – 37 37 4,400 – 4,400 90,283 – 90,283 – – – – – – – Total £000 9,898 3,503 13,401 158,961 1,828 1,113 161,902 Total £000 2,239 1,016 37 3,292 96,883 1,132 98,015 Capital risk management The Board’s primary objective when monitoring capital is to preserve the Group’s ability to continue as a going concern, while ensuring it remains within its debt covenants so as to safeguard secured assets and avoid financial penalties. Bank borrowings are secured on the Group’s property portfolio by way of fixed charges over property assets and over the shares in the property-owning subsidiaries and any intermediary holding companies of those subsidiaries. The Group does not provide any cross-group guarantees nor does the Company act as a guarantor to the lending bank. A N N U A L R E P O R T 2 0 1 9 6 9 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 18. Categories of financial instruments continued At 30 June 2019, the capital structure of the Group consisted of bank borrowings (note 17), cash and cash equivalents, and equity attributable to the shareholders of the Company (comprising share capital, retained earnings and the other reserves referred to in notes 19 and 20). In managing the Group’s capital structure, the Board considers the Group’s cost of capital. In order to maintain or adjust the capital structure, the Group keeps under review the amount of any dividends or other returns to shareholders and monitors the extent to which the issue of new shares or the realisation of assets may be required. Reconciliation of financial liabilities relating to financing activities Bank borrowings due in more than one year £000 Interest and commitment fees payable £000 Interest rate derivatives £000 Total £000 At 1 July 2018 88,099 447 (37) 88,509 Cashflows: Debt drawdowns in the Year Debt repayments in the Year Interest and commitment fees paid Loan arrangement fees paid Interest rate cap premium paid Non-cash movements: Finance costs in the statement of comprehensive income Fair value changes At 30 June 2019 At 1 June 2017 Cashflows: Debt drawdowns in the period Debt repayments in the period Interest and commitment fees paid Loan arrangement fees paid Interest rate cap premium paid Non-cash movements: Finance costs in the statement of comprehensive income Fair value changes At 30 June 2018 128,341 (72,291) – (933) – 492 – 143,708 – – (3,365) – – 3,663 – 715 – – – – (27) 54 1,122 1,113 Bank borrowings due in more than one year £000 Interest and commitment fees payable £000 Interest rate derivatives £000 – – – 98,430 (9,586) – (1,029) – 284 – 88,099 – – (1,147) – – 1,594 – 447 – – – – (158) 39 82 (37) 88,509 128,341 (72,291) (3,365) (933) (27) 4,180 1,122 145,535 Total £000 – 98,430 (9,586) (1,147) (1,029) (158) 1,917 82 Movements in respect to share capital are disclosed in note 19 below. The interest and commitment fees payable are included within the corporate accruals balance in note 15. Cash flow movements are included in the consolidated statement of cash flows and the non-cash movements are included in note 8. The movements in the interest rate derivative financial asset can be found in note 16. 7 0 S U P E R M A R K E T I N C O M E R E I T P LC 19. Share capital As at 1 July 2018 Ordinary shares issued and fully paid – 26 March 2019 Ordinary shares issued and fully paid – 24 April 2019 Share issue costs Dividends paid in the Year (note 11) Ordinary shares of 1 pence Number 184,356,434 44,554,455 10,922,330 – – Share capital £000 1,844 446 109 – – Share premium reserve £000 149,039 44,554 11,141 (1,062) Capital reduction reserve £000 Total £000 25,325 176,208 – – – 45,000 11,250 (1,062) – (10,934) (10,934) As at 30 June 2019 239,833,219 2,398 203,672 14,391 220,461 Ordinary shares of 1 pence Number Share capital £000 Share premium reserve £000 Capital reduction reserve £000 As at 1 June 2017 Issue of 1 ordinary share Issue of 50,000 redeemable preference shares – one quarter paid up Redemption and cancellation of 50,000 redeemable preference shares Ordinary shares issued and fully paid – 18 July 2017 Ordinary shares issued and fully paid – 15 November 2017 Ordinary shares issued and fully paid – 25 May 2018 Cancellation of 1 ordinary share Share issue costs Transfer to capital reduction reserve Dividends paid in the period (note 11) – 1 – – – – 12 (12) – – – – 100,000,000 1,000 99,000 19,999,999 64,356,435 (1) – – – 200 644 – – – – 19,800 64,356 – (4,117) (30,000) – 30,000 (4,675) – – – – – – – – Total £000 – – 12 (12) 100,000 20,000 65,000 – (4,117) – (4,675) As at 30 June 2018 184,356,434 1,844 149,039 25,325 176,208 Share allotments and other movements in relation to the capital of the Company in the period: On 26 March 2019 the Company completed a equity fundraising and issued an additional 44,554,455 ordinary shares of one pence each at a price of £1.01 per share. The consideration received in excess of the par value of the ordinary shares issued, net of total capitalised issue costs, of £43.9 million was credited to the share premium reserve. On 25 April 2019 the Company issued an additional 10,922,330 ordinary shares to the Charities Pension Fund, as partial consideration for the acquisition of Tesco Mansfield, of one pence each at a price of £1.03 per share. The consideration received in excess of the par value of the ordinary shares issued, net of total capitalised issue costs, of £11.3 million was credited to the share premium reserve. Ordinary shareholders are entitled to all dividends declared by the Company and to all the Company’s assets after repayment of its borrowings and ordinary creditors. Ordinary shareholders have the right to vote at meetings of the Company. All ordinary shares carry equal voting rights. A N N U A L R E P O R T 2 0 1 9 7 1 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 20. Reserves The nature and purpose of each of the reserves included within equity at 30 June 2019 are as follows: • Share premium reserve: represents the surplus of the gross proceeds of share issues over the nominal value of the shares, net of the direct costs of equity issues • Cash flow hedge reserve: represents cumulative gains or losses, net of tax, on effective cash flow hedging instruments • Capital reduction reserve: represents a distributable reserve created following a Court approved reduction in capital less dividends paid • Retained earnings represent cumulative net gains and losses recognized in the statement of comprehensive income. The only movements in these reserves during the period are disclosed in the consolidated statement of changes in equity. 21. Capital commitments The Group had no capital commitments outstanding as at 30 June 2019. 22. Operating leases The Group’s principal assets are investment properties which are leased to third parties under non-cancellable operating leases. The weighted average remaining lease term at 30 June 2019 is 18.4 years (2018: 18.6 years) and there are no break options. The leases contain either fixed or RPI-linked uplifts. The future minimum lease payments receivable under the Group’s leases, are as follows: Within one year Between one year and five years More than five years 23. Net asset value per share As at 30 June 2019 £000 As at 30 June 2018 £000 19,241 77,366 260,172 13,758 55,422 194,032 356,779 263,212 Basic NAV per share is calculated by dividing the Group’s net assets as shown in the consolidated statement of financial position that are attributable to the ordinary equity holders of the Company by the number of ordinary shares outstanding at the end of the period. As there are no dilutive instruments outstanding, basic and diluted NAV per share are identical. EPRA has issued guidelines aimed at enabling entities to provide a comparable measure of NAV on the basis of long term fair values. The EPRA measure excludes items that are considered to have no impact in the long term. For the current period EPRA NAV is calculated as net assets per the consolidated statement of financial position excluding the fair value of interest rate derivatives. NAV and EPRA NAV per share calculation are as follows: Net assets per the consolidated statement of financial position Fair value of interest rate derivatives EPRA NAV Ordinary shares in issue at 30 June 2018 NAV per share – Basic and diluted (pence) EPRA NAV per share (pence) 7 2 S U P E R M A R K E T I N C O M E R E I T P LC As at 30 June 2019 £000 As at 30 June 2018 £000 230,470 1,113 176,746 (37) 231,583 176,709 Number 239,833,219 96p 97p 184,356,434 96p 96p 24. Transactions with related parties Details of the related parties to the Group in the period and the transactions with these related parties were as follows: a. Directors Directors’ fees Nick Hewson, Chairman of the Board of Directors of the Company, is paid fees of £55,000 per annum, with the other two Directors each being paid fees of £35,000 per annum. Jon Austen is paid an additional £5,000 per annum for his role as chair of the Company’s Audit Committee and Vince Prior is paid an additional £3,500 per annum for his role as Senior Independent Director. The total remuneration payable to the Directors in respect of the current year and previous period is disclosed in note 7. There were no amounts outstanding at the end of either period. Directors’ interests Details of the direct and indirect interests of the Directors and their close families in the ordinary shares of one pence each in the Company at 30 June 2018 were as follows: • Nick Hewson: 380,000 shares (0.16% of issued share capital) • Jon Austen: 99,000 shares (0.04% of issued share capital) • Vince Prior: 55,431 shares (0.02% of issued share capital) b. Investment Adviser Advisory fees The investment adviser to the Group, Atrato Capital Limited (the ‘Investment Adviser’), is entitled to certain advisory fees under the terms of the Investment Advisory Agreement (the ‘Agreement’) dated 20 June 2017. The entitlement of the Investment Adviser to advisory fees is by way of what are termed ‘Monthly Management Fees’ and ‘Semi-Annual Management Fees’ both of which are calculated by reference to the net asset value of the Group at particular dates, as adjusted for the financial impact of certain investment events and after deducting any un-invested proceeds from share issues up to the date of the calculation of the relevant fee (these adjusted amounts are referred to as ‘Adjusted Net Asset Value’ for the purpose of calculation of the fees in accordance with the Agreement). Until the Adjusted Net Value of the Group exceeds £500 million, which it has not as at 30 June 2019, the entitlements to advisory fees can be summarised as follows: • Monthly Management Fee payable monthly in arrears: 1/12th of 0.7125% per calendar month of Adjusted Net Asset Value up to or equal to £500 million; • Semi-Annual Management Fee payable semi-annually in arrears: 0.11875% of Adjusted Net Asset Value up to or equal to £500 million. For the period to 30 June 2019 the total advisory fees payable to the Investment Adviser were £1,814,000 (2018: £1,079,000) of which £379,000 (2018: £304,000) is included in trade and other payables in the consolidated statement of financial position. Interest in shares of the Company Details of the direct and indirect interests of the Directors of the Investment Adviser and their close families in the ordinary shares of one pence each in the Company at 30 June 2019 were as follows: • Ben Green: 1,122,491 shares (0.47% of issued share capital) • Steve Peter Windsor: 1,166,018 shares (0.49% of issued share capital) A N N U A L R E P O R T 2 0 1 9 7 3 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 24. Transactions with related parties continued c. Transactions with other related parties Morgan Williams acts as the Senior Adviser to the Company, with their appointment being to provide their supermarket expertise to assist in sourcing suitable assets for investment. They are therefore considered to provide key management personnel services to the Company. Any fees payable to the Senior Adviser form part of the acquisition costs in relation to the acquisition of the relevant property. Mark Morgan is a partner in Morgan Williams and sits on the Investment Committee of the Investment Adviser. In the period to 30 June 2019 the amount payable to Morgan Williams for these services was £483,000 (2018: £1,273,000) all of which has been capitalised as additions to investment properties. No amounts payable were outstanding at the end of either period. Other transactions: Other than those related party transactions disclosed in this or other notes to the financial statements the Directors are not aware of any transactions with related parties requiring disclosure. The Company does not have an ultimate controlling party. 25. Post balance sheet events On 28 August 2019, the Group acquired a Sainsbury’ Supermarket in Lancashire, Preston for £54.4 million (excluding acquisition costs). The Company has also arranged a new five-year, fixed rate loan facility with Deka Bank. The £48.1million facility has a margin of 135 basis points and is secured against the new Sainsbury’s supermarket in Preston and the Tesco supermarket in Mansfield. The Deka Bank facility also contains a £40 million accordion option which allows the Group the option to expand the £47.6 million debt by a further £40 million, subject to Deka Bank credit approval, during the term of the facility. On 08 July 2019, the Board declared a Q4 interim dividend of 1.419 pence per share, which was paid on 07 August 2019 to shareholders on the register on 19 July 2019. 7 4 S U P E R M A R K E T I N C O M E R E I T P LC COMPANY STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2019 Non-current assets Investments in subsidiaries Total non-current assets Current assets Trade and other receivables Cash and cash equivalents Total current assets Total assets Current liabilities Trade and other payables Total current liabilities Total liabilities Total net assets Equity Share capital Share premium reserve Capital reduction reserve Accumulated Profit Total equity As at 30 June 2019 £000 As at 30 June 2018 £000 Notes C 228,458 172,466 222,458 172,466 D E F 831 7,531 8,362 3,780 225 4,005 230,820 176,471 9,529 9,529 9,529 609 609 609 221,291 175,862 2,398 203,672 14,391 829 1,844 149,039 25,325 (346) 221,291 175,862 The notes on pages 77 to 78 form part of these financial statements. The Company has taken advantage of the exemption within section 408 of the Companies Act 2006 not to present its own profit and loss account. The accumulated profit for the year dealt with the financial statements of the Company was £1,175,000 (2018: loss 346,000). As at 30 June 2019 the Company has distributable reserves of £15.2 million. The Company financial statements were approved and authorised for issue by the Board of Directors on 3 September 2019 and were signed on its behalf by: Nick Hewson Chairman 3 September 2019 A N N U A L R E P O R T 2 0 1 9 7 5 COMPANY STATEMENT OF CHANGES IN EQUITY FOR THE PERIOD FROM 1 JULY 2018 TO 30 JUNE 2019 As at 1 July 2018 Profit and total comprehensive Income for the period Transactions with owners Ordinary shares issued at a premium during the period Share issue costs Interim dividends paid As at 30 June 2019 Share capital £000 1,844 Share premium reserve £000 149,039 Capital reduction reserve £000 25,325 Accumulated Profit £000 Total £000 (346) 175,862 – – 555 55,695 – – – – (1,062) – – (10,934) 1,175 1,175 – – – 56,250 (1,062) (10,934) 2,398 203,672 14,391 829 221,291 COMPANY STATEMENT OF CHANGES IN EQUITY FOR THE PERIOD FROM 1 JUNE 2017 TO 30 JUNE 2018 Share capital £000 Share premium reserve £000 Capital reduction reserve £000 Accumulated Loss £000 Total £000 As at 1 June 2017 Profit and total comprehensive Loss for the period – – Transactions with owners Ordinary shares issued at a premium during the period 1,844 183,156 – – Share issue costs Issue of redeemable preference shares Redemption of redeemable preference shares Transfer to capital reduction reserve Interim dividends paid – 12 (12) – – (4,117) – – (30,000) – – – – 30,000 (4,675) (346) (346) – – – – – – 185,000 (4,117) 12 (12) – (4,675) As at 30 June 2018 1,844 149,039 25,325 (346) 175,862 The notes on pages 77 to 78 form part of these financial statements. 7 6 S U P E R M A R K E T I N C O M E R E I T P LC NOTES TO THE COMPANY FINANCIAL STATEMENTS A. Basis of preparation The Company’s financial statements have been prepared in accordance with FRS 102, the Financial Reporting Standard applicable in the United Kingdom and the Republic of Ireland. The principal accounting policies relevant to the Company are as follows: • Investments in subsidiaries are recognised at cost less provision for any impairment; • Loans and receivables are recognised initially at fair value plus transaction costs less provision for impairment; • Trade payables are recognized initially at fair value and subsequently at amortised cost; • Equity instruments are recognised as the value of proceeds received net of direct issue costs; and • Dividends are recognised as a financial liability and deduction from equity in the period in which they are declared In preparing the Company’s financial statements, advantage has been taken of the following disclosure exemptions available in FRS 102: • no cash flow statement has been presented; • disclosures in respect of the Company’s financial instruments have not been presented as equivalent disclosures have been provided in respect of the Group; • no reconciliation of the number of shares outstanding at the beginning and end of the year has been presented as it is identical to the reconciliation for the Group shown in note 18 to the Group financial statements; and • no disclosure has been given for the aggregate remuneration of the key management personnel of the Company as their remuneration is shown in note 6 to the Group financial statements In the year to 30 June 2020, the Company intends to continue to use these disclosure exemptions unless objections are received from shareholders. B. Significant accounting judgements, estimates and assumptions In preparing the financial statements of the company, the directors have made the following judgements: • Determine whether there are any indicators of impairment of the investments in subsidiary undertakings. Factors taken into consideration in reaching such a decision include the financial position and expected future performance of the subsidiary entity. C. Auditors’ remuneration The remuneration of the auditors in respect of the audit of the Company’s Consolidated and Individual Financial Statements for the Year was £74,000 (2018: £55,000). Fees payable for audit and non-audit services provided to the Company and the rest of the Group are disclosed in note 6 to the consolidated financial statements. D. Investment in subsidiary undertakings The Company’s wholly owned direct subsidiaries are Supermarket Income Investments UK Limited, Supermarket Income Investments (Midco2) UK Limited and Supermarket Income Investments (Midco3) UK Limited, all of which are incorporated and operating in England with a registered address of 7th Floor 9 Berkeley Street, London, England, W1J 8DW. The full list of subsidiary entities directly and indirectly owned by the Company is disclosed in note 13 to the Consolidated Financial Statements. The movement in the period was as follows: As at 1 July 2018 Additions As at 30 June 2018 Impairments of investments in subsidiaries Closing value per Statement of Financial Position As at 30 June £000 172,466 84,897 257,363 (34,905) 222,458 A N N U A L R E P O R T 2 0 1 9 7 7 NOTES TO THE COMPANY FINANCIAL STATEMENTS CONTINUED As at 1 June 2017 Additions As at 30 June 2018 As at 30 June £000 – 172,466 172,466 An impairment of investments in subsidiaries was recognised during the year following the payment of an upstream dividend to the Company. Following the payment of the dividend, the net assets of the dividend paying subsidiary no longer supported the carrying value of the Company’s investment in that enity and thus an impairment charge was recognised to bring the carrying value of the investment in line with the recoverable amount. E. Trade and other receivables Intercompany receivables Prepayments and accrued income Corporation tax receivable VAT receivable Other receivables Total trade and other receivables F. Trade and other payables Corporate accruals Intercompany payables Total trade and other payables G. Share capital As at 30 June 2019 £000 As at 30 June 2018 £000 637 16 – 153 25 831 3,293 19 310 129 29 3,780 As at 30 June 2019 £000 As at 30 June 2018 £000 768 8,761 – 9,529 609 609 Details of the share capital of the Company are disclosed in note 18 to the Consolidated financial statements. H. Related party transactions Details of related party transactions are disclosed in note 24 to the Group financial statements. 7 8 S U P E R M A R K E T I N C O M E R E I T P LC UNAUDITED SUPPLEMENTARY INFORMATION Key performance indicators Our objective is to deliver attractive, low-risk returns to Shareholders, by executing the Investment Policy. Set out below are the key performance indicators we use to track our progress. KPI and definition Total Shareholder Return for the Period 1 July 2018 to 30 June 2019 Total Shareholder Return is measured by reference to the growth in the Company’s share price over a period, plus dividends declared over the same period divided by the share price at the beginning of the financial year. Weighted average unexpired lease term as at 30 June 2019 The average unexpired lease term of the property portfolio, weighted by valuation. EPRA NAV per share as at 30 June 2019 The value of our assets (based on an independent valuation) less the book value of our liabilities, attributable to Shareholders and calculated in accordance with EPRA guidelines. Net Loan to value ratio Balance sheet loan amount less cash balances divided by total investment properties valuation. EPRA Cost Ratio Administrative and operating costs divided by gross rental income. Earnings per share (EPS) Earnings attributable to Shareholders adjusted for other earnings not supported by cash flows and calculated in accordance with EPRA guidelines. Performance 8% 18 years 97 pence 36% 18% 5.0 pence Total Shareholder Return Shareholder return is one of the Group’s principal measures of performance. Total Shareholder Return (“TSR”) is measured by reference to the growth in the Company’s share price over a period, plus dividends. The tables below show the calculation of TSR for the Period. Total Shareholder Return Share price at start of the year Share price at the end of the year Increase in share price Dividends declared for the year Increase in share price plus dividends Share price at start of period Total Shareholder Return As at 30 June 2019 As at 30 June 2018 Pence per share Pence per share 102.5 105.0 2.5p 5.6p 8.1p 100.0p 102.5p 2.5p 5.5p 8.0p 102.5p 100.0p 8.0% 8.0% A N N U A L R E P O R T 2 0 1 9 7 9 UNAUDITED SUPPLEMENTARY INFORMATION CONTINUED Net loan to value ratio The proportion of our gross asset value that is funded by borrowings calculated as balance sheet borrowings less cash balances divided by total investment properties valuation. Net Loan to value Bank borrowings Less cash and cash equivalents Net borrowings Investment properties valuation Net Loan to value ratio EPRA measures EPRA NAV Per Share EPRA Triple Net Asset Value (NNNAV) Per Share EPRA EPS EPRA Net Initial Yield EPRA Topped Up Net Initial Yield EPRA Vacancy Rate EPRA Cost Ratio Adjusted EPRA Cost Ratio Further information on these EPRA measures is included below. EPRA NAV per share EPRA NAV (note 10) Fair value of interest rate derivatives EPRA NAV EPRA Triple Net Asset Value Per Share EPRA NAV (note 10) Fair value of interest rate derivatives Adjustments to reflect fair value of bank borrowings EPRA Triple Net Asset Value Per Share As at 30 June 2019 £000 As at 30 June 2018 £000 143,708 (9,898) 133,810 368,230 88,099 (2,239) 85,860 264,900 36% 32% As at 30 June 2019 As at 30 June 2018 Pence per share Pence per share 97p 96p 96p 95p 1 July 2018 to 30 June 2019 1 June 2017 to 30 June 2018 5.0 pence 4.9% 4.9% 0% 17.9% 17.9% 3.8 pence 4.9% 4.9% 0% 23.4% 20.5% As at 30 June 2019 £000 Pence per share 230,470 1,113 231,583 96p 1p 97p As at 30 June 2019 £000 Pence per share 231,583 (1,113) (1,185) 229,284 97p – – 96p The EPRA triple NAV is adjusted to reflect the fair values of any debt and hedging instruments, and any inherent tax liabilities not provided for in the financial statements. EPRA NAV Per Share and EPRA Triple Net Asset Value Per Share are calculated on the number of shares in issue at each balance sheet of 239,833,219. 8 0 S U P E R M A R K E T I N C O M E R E I T P LC EPRA EPS For the period from 1 July 2018 to 30 June 2019 Basic and diluted EPS (note 10) Adjustments to remove: Changes in fair value of investment properties EPRA EPS Net profit Weighted attributable average number of ordinary to ordinary shares1 shareholders Number £000 Earnings per share Pence 10,593 198,087,482 5.3p (647) – 9,946 198,087,482 (0.3)p 5.0p 1 Based on the weighted average number of ordinary shares in issue in the year ending 30 June 2019. EPRA Net Initial Yield Wholly owned investment property at external valuation (note 12) Allowance for estimated purchasers’ costs at 6.8% Grossed up completed property portfolio valuation Annualised net rents EPRA Net Initial Yield EPRA Topped Up Net Initial Yield EPRA Topped Up Net Initial Yield As at 30 June 2019 £000 As at 30 June 2018 £000 368,230 25,039 264,900 18,013 393,269 282,913 As at 30 June 2019 £000 As at 30 June 2018 £000 19,209 4.9% 13,727 4.9% As at 30 June 2019 As at 30 June 2018 4.9% 4.9% There are no unexpired tenant incentives therefore EPRA topped up net initial yield is the same as EPRA net initial yield in each year. EPRA Vacancy Rate EPRA Vacancy Rate The Group had no vacant property in the Period. EPRA Cost Ratio EPRA Gross Rental Income Administrative and other expenses (note 5) EPRA Costs As at 30 June 2019 As at 30 June 2018 0% 0% 1 July 2018 to 30 June 2019 £000 1 June 2017 to 30 June 2018 £000 17,231 3,088 3,088 8,942 2,097 2,097 EPRA Cost Ratio inclusive and exclusive of vacant property costs 17.9% 23.4% The Group has had no vacant property, therefore the EPRA Cost Ratio is the same inclusive and exclusive of vacant property costs. The Group has no capitalised overheads or operating expenses. A N N U A L R E P O R T 2 0 1 9 8 1 UNAUDITED SUPPLEMENTARY INFORMATION CONTINUED Adjusted EPRA Cost Ratio The Group also calculates an Adjusted EPRA Cost Ratio excluding from administrative and other expenses £260,000 of non-recurring costs relating to the establishment of the Group to give what the Board considers to be a measure of cost efficiency more directly relevant to its ongoing cost performance. EPRA gross rental income Administrative and other expenses (note 5) non-recurring costs relating to the establishment of the Group Adjusted EPRA Cost Adjusted EPRA Cost Ratio excluding non recurring costs 1 July 2018 to 30 June 2019 £000 1 June 2017 to 30 June 2018 £000 17,231 3,088 – 3,088 17.9% 8,942 2,097 (260) 1,837 20.5% 8 2 S U P E R M A R K E T I N C O M E R E I T P LC GLOSSARY AGM AIFMD EPRA EPRA EPS Annual General Meeting Alternative Investment Fund Managers Directive European Public Real Estate Association A measure of EPS designed by EPRA to present underlying earning from core operating activities EPRA Guidance The EPRA Best Practices Recommendations Guidelines November 2016 EPRA NAV EPS FRI IFRS A measure of NAV designed by EPRA to present the fair value of a company on a long term basis, by excluding items such as interest rate derivatives that are held for long term benefit, net of deferred tax Earnings per share, calculated as the profit for the period after tax attributable to members of the parent company divided by the weighted average number of shares in issue in the period A lease granted on an FRI basis means that all repairing and insuring obligations are imposed on the tenant, relieving the landlord from all liability for the cost of insurance and repairs International Financial Reporting Standards adopted for use in the European Union Investment Advisory Agreement The agreement between the Company and the Investment Adviser, key terms of which are set out on page 101-102 of the IPO Prospectus IPO LTV NAV An initial public offering (IPO) refers to the process of offering shares of a corporation to the public in a new stock issuance Loan to Value: the outstanding amount of a loan as a percentage of property value Net Asset Value Net Initial Yield Annualised net rents on investment properties as a percentage of the investment property valuation, less assumed purchaser’s costs of 6.8% Net Loan to Value or Net LTV LTV calculated on the gross loan amount less cash balances Omnichannel Stores offering both instore picking and online fulfilment REIT Running yield Real Estate Investment Trust The anticipated Net Initial Yield at a future date, taking account of any rent reviews in the intervening period Total Shareholder Return The movement in share price over a period plus dividends declared for the same period expressed as a percentage of the share price at the start of the Period WAULT Weighted Average Unexpired Lease Term. It is used by property companies as an indicator of the average remaining life of the leases within their portfolios A N N U A L R E P O R T 2 0 1 9 8 3 CONTACTS AND COMPANY DETAILS Directors Company Secretary AIFM Investment Adviser Financial adviser, Broker and Placing Agent Auditors Property Valuers Financial PR Advisers Registrar Nick Hewson (Chairman) Vince Prior (Senior Independent Director) Jon Austen (Chair of Audit Committee) JTC 7th Floor, 9 Berkeley Street London W1J 8DW JTC Global AIFM Solutions Limited Ground Floor, Dorey Court, Admiral Park St Peter Port Guernsey, Channel Islands GY1 2HT Atrato Capital Limited 8 Greencoat Place London SW1P 1PL Stifel Nicolaus Europe Limited 150 Cheapside London EC2V 6ET BDO LLP 55 Baker Street London W1U 7ET Cushman & Wakefield 125 Old Broad Street London EC2N 1AR Tavistock 1 Cornhill London EC3V 3ND Link Asset Service The Registry, 34 Beckenham Road Beckenham, Kent BR3 4TU Registrar’s email address: enquiries@linkgroup.co.uk Website www.supermarketincomereit.com Registered office 7th Floor, 9 Berkeley Street London W1J 8DW Stock exchange ticker ISIN SUPR GB00BF345X11 8 4 S U P E R M A R K E T I N C O M E R E I T P LC Design and production: theteam.co.uk Print: Westerham Print Supermarket Income Reit Plc 7th Floor, 9 Berkeley Street London W1J 8DW www.supermarketincomereit.com 

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