I reckon shareholders in Supermarket Income REIT (LSE:SUPR), one of the FTSE 250’s real estate investment trusts, will have been delighted with its share price performance over the past week or so.
On 3 April, the day after President Trump unveiled his tariffs, and when many investors around the world appeared to go into panic mode, its share price went up.
Its simple business model, which involves leasing supermarket space to well-known grocery chains, isn’t going to be directly affected by a global ‘trade war’. And even if the world goes into recession, supermarkets will still need premises to trade from.
Of course, there’s a risk that an economic slowdown will result in some of its tenants going out of business. But its blue-chip customer base, including Tesco and Sainsbury‘s, are likely to survive the worst of any downturn.
It currently has 82 stores on its books, which have been valued by the company at £1.8bn.
Special treatment
And because it’s a REIT, it has to return at least 90% of its profit to shareholders. If it doesn’t, it will lose some of the tax advantages that it presently enjoys.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.
Impressively, Supermarket Income REIT’s been steadily increasing its dividend in recent times. It also makes quarterly payments, which helps ensure a steady flow of income for shareholders. In cash terms, its four payouts over the past 12 months were 4.5% higher than they were during its June 2020 financial year.
Presently (8 April), the stock’s yielding a very impressive 8.3%. This is over twice the average for the FTSE 250.
Also, with a weighted average unexpired lease term of 12 years, it has good visibility over its future income streams. Some of its contracts carry provisions for rent increases linked to the current rate of inflation.
Its shares are currently trading at an 18% discount to the trust’s net asset value. This is common for many investment trusts, not just those exposed to the property sector. I think it reflects, in part, investor concerns about difficulties in accurately valuing unquoted assets. However, the trust recently sold a store in Newmarket for a 7.4% premium to its book value. This gives me some comfort that the management team’s conservatively valuing its properties.
Pros and cons
However, there are some risks. As with all investments, there’s no guarantee that current dividend levels will be maintained. In particular, they could come under pressure if interest rates remain at their present relatively high levels.
In common with many REITs, its earnings are also sensitive to borrowing costs as property acquisitions are usually funded by debt. Also, the commercial property sector can be volatile. If property values fall, it could impact on its future borrowing capacity. Rents could also come under pressure.
But I think Supermarket Income REIT’s share price performance in recent days demonstrates that is has defensive qualities. Although it’s unlikely to expand rapidly in the coming years, it does offer a generous dividend.
For these reasons, during the turbulent times that we are currently living through, it could be a stock for cautious income investors to consider.
