The FTSE 250‘s been on a rampage of late. Since October 2023, the mid-cap index is up by more than 30% as inflation cools. However, not all of its constituents have been so fortunate. And there remain plenty struggling to bounce back. But has this lack of attention from investors actually created terrific buying opportunities?
A new bargain?
Among the shares trading at a discount today, Supermarket Income REIT (LSE:SUPR) currently stands out. The stock’s down more than 40% over the last two years, and currently trades 16% below its net asset value. As such, the dividend yield’s shot right up now, sitting at 8.2%.
High yields can often be a warning to stay away. Yet, despite appearances, management continues to reward shareholders for their loyalty. In fact, it’s just raised dividends for the sixth year in a row. So what’s going on?
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Like many companies operating within the real estate sector, higher interest rates are a massive problem. Since buying properties is expensive, these firms are notoriously reliant on debt to fund their expansion.
That’s especially true for Supermarket Income since, as its name suggests, it operates a portfolio of properties leased to supermarkets. And these assets are far more expensive compared to residential homes.
While this business isn’t a household name, it’s the landlord to plenty that are. Aldi, Asda, Marks & Spencer, Morrisons, Sainsbury’s, Tesco, and Waitrose are all long-time tenants. And following a recent acquisition in France, Carrefour, one of the largest retailers in the world, has just joined the ranks.
As a result, the average lease terms currently sit at 13 years, translating into recurring and reliable cash flows. And with it comes ever-increasing dividends.
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What’s the catch?
Following its latest interim results, rental income’s still growing by double digits, with operating profits up at an even faster pace.
As of December 2023, the group has £584m of outstanding debt on its balance sheet, that’s subsequently increased after drawing on a revolving credit facility to fund the previously-mentioned France acquisition. However, following a £170m refinancing plan, the group’s loan-to-value ratio remains under management’s upper limit of 40%, at 37%.
That’s still quite close, but its cash flows appear more than sufficient to cover the subsequent interest expenses. And with the average loan maturity sitting at four years, Supermarket Income has plenty of breathing space to pay down debts.
But while the balance sheet and income appear robust, there are some valid concerns surrounding future growth. There’s a growing trend among British supermarkets where retailers are buying back their own stores rather than leasing them. Subsequently, the large retail rental market’s actually shrinking.
Time to buy?
Management’s decision to expand into Europe makes a lot of sense, in my opinion. It already controls a large portion of the British market. And if current trends continue, the portfolio expansion opportunities at home won’t be as prevalent as they once were.
Prudent leadership’s always a welcome sight. And when paired with high cash generation and a cheap valuation, I can’t help but look at Supermarket Income REIT as a potential buying opportunity for my portfolio when I have more capital at hand.
