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
)
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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
)
%
(
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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
)
%
(
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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
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y
l
a
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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.
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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