Fitch Ratings has affirmed
SUPR's rating reflects the group's growing
The rating is constrained by an inherent lack of portfolio diversity and high tenant concentration, which reflects the
SUPR's financial profile is in line with its long-term policy's loan-to-value (LTV) range of 30%-40% translating into net debt/EBITDA of 8.0x-9.0x and interest coverage above 5.5x.
Key Rating Drivers
Long-Term Leases; Inflation-Linked Rental Uplifts: The rating is supported by the portfolio's long weighted average unexpired lease term (WAULT) of 15 years. This is typical of
High-Quality but Concentrated Tenant Base: As at end-2QFY23, SUPR directly owned 50 predominantly omnichannel fulfilment stores. The portfolio is concentrated around the
Robust
Omnichannel Fulfilment Supermarkets Dominant: SUPR's portfolio is focused on omnichannel fulfilment stores (93% of portfolio value), which optimise operational synergies of all three channels (in-store, click-and-collect, and online delivery). The stores in SUPR's portfolio are dominant in their respective catchments. The top four supermarkets report an increase in their grocery delivery capacity by over 100% (adding 2 million slots) versus pre-pandemic. Additional infrastructure, including delivery van facilities, click-and-collect areas, and systems, has been put in place. Operators are using their existing stores, rather than creating new bespoke centralised fulfilment centres, and thus optimise complementary omnichannel systems.
Sainsbury's JV Stake Increase: SUPR increased its stake in Sainsbury Reversionary JV- which owns a portfolio of 26 Sainsbury's assets valued at
Acquisition-Led Growth: Fitch expects SUPR to continue to grow by acquiring omnichannel supermarket assets into its direct portfolio. SUPR acquired
Moderate Financial Profile: SUPR has a long-term policy LTV range of 30%-40%, translating into net debt/EBITDA of 8.0x-9.0x. Additional debt drawn down for the increased participation in Sainsbury Reversionary JV are partly repaid in 2HFY23, and final monetisation proceeds are received only in 1QFY24. However, with little rental revenue to show for the FY23 investment, net debt/EBITDA would be slightly higher in FY23. Nevertheless, Fitch's forecast for FY23 leverage at around 8.2x is well within the rating sensitivities.
Financial Profile Headroom: Management plans to access additional equity to maintain its target LTV as the portfolio grows (FYE22 Fitch-calculated LTV: 19%). Debt drawdown for further acquisitions and increasing JV participation in 2HFY23 has resulted in LTV of around 40%. SUPR expects to reduce this to around 30% in
Derivation Summary
The Fitch-rated retail real estate portfolio includes entities with (i) full-service large retail shopping centres (SCs); and (ii) affordable-rent, convenience-led, local SCs and retail parks. The full-service large SCs include
The SUPR portfolio is carefully assessed and chosen by SUPR and its investment advisor
Within the Fitch-rated retail real estate portfolio, SUPR is unique in its sector specialisation, which leads to tenant concentration. SUPR's tenant profile reflects the
SUPR's long-term leases (portfolio WAULT of 15 years) and affordable rents (rent/turnover of 4%) is comparable to NewRiver with its 6% rent/store turnover and results in resilient rental income in contrast to unaffordable rent pressures for peers like Hammerson (above 20% occupancy cost ratio (OCR)) and Unibail (2019 OCR of 15.5%). While 83% of the leases have RPI/CPI/fixed-rental uplifts, these are capped at 4%-5%, which has kept rental uplifts generally below food inflation and rents affordable.
Among rated retailers, Lar Espana and IGD with their portfolio quality, resilient rental revenue streams and NIY of around 6% have net debt/EBITDA rating sensitivities of around 8.0x for 'BBB+' and 9.0x for 'BBB', respectively. SUPR's portfolio quality along with its defensive income stream owing to the essential nature of grocery business compares well with Lar Espana's and IGD's and hence has net debt/EBITDA rating sensitivity in the 8.0x-9.0x range. In comparison, the non-prime portfolio of NewRiver has a net debt/EBITDA rating sensitivity of 6x for an upgrade to 'BBB+'.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer
Fitch has simplified forecasting by using annualised rents such that all assets acquired part-way during the year make a full-year contribution to rents
Eighty-three per cent of rents have upward-only RPI/CPI/fixed uplifts but which are capped at 4%-5%. The rest are subject to open-market reviews. Fitch's rating case uses a blended 4% for FY23 and FY24, 3% for FY25 and 2% per year in FY26
Acquisitions of
Cash proceeds from the Sainsbury's Reversionary Portfolio JV of around
Ordinary dividends at
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Increased tenant diversity while maintaining a focus on top quartile omnichannel supermarkets
Net debt/EBITDA below 8x
Net interest cover above 4x
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Net debt/EBITDA above 9x
Net interest cover below 3x
Funds from operations dividend cover below 1.0x
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Good Liquidity: SUPR plans to partly pay off before FYE23 the additional debt drawn down during the course of 1HFY23 for acquisitions and increased participation in the Sainsbury Reversionary JV using proceeds from the JV monetisations. Future cash generation is adequate to meet debt repayments. SUPR has entered into early negotiations to refinance debt maturing in FY25. In addition, SUPR maintains RCF facilities with various banks, of which
At this time of valuation uncertainties (including the potential for independent valuation to overstate the decline), the likelihood of an LTV breach by SUPR is not regarded by Fitch as a significant rating risk as an LTV breach in a secured financing has remedy options including equity cures, additional unencumbered stores, and capacity to bring forward plans to refinance the debt.
Secured and Unsecured Debt Mix: Until FYE21, SUPR had only secured bank debt. In FY22, it started to transition to unsecured debt sourced from banks. SUPR continues to consider issuance of unsecured bonds or private placements once market conditions are more conducive.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
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