Supermarket Income REIT is proposing to internalise its management function, with the board and its current manager Atrato Group reaching agreement on a £19.7m deal.

The board said that it believes the move delivers a number of compelling financial and strategic benefits, including:

• Significant cost savings of at least £4m per annum, equivalent to a yield on cost of c.19%
• Delivering the highest return on capital of any capital allocation option, whilst share buybacks and property acquisitions remain under consideration for future capital recycling
• Opportunity to achieve a material enhancement in EPRA earnings and long-term dividend cover, with the potential for higher future dividend growth
• A new EPRA cost ratio target of below 9%, one of the lowest in the sector
• Enhancing the alignment between the company, its management and shareholders
• Simplified management structure, securing the specialist supermarket fund management team and platform through the transfer of the systems, know-how and proprietary market knowledge that Atrato has developed since 2017
• Creating a structure more appropriate for a UK REIT of the scale of SUPR, providing greater strategic flexibility, improving shareholder returns and broadening SUPR’s potential investor universe
• Enabling the company to pursue a transfer of its listing to the “equity shares (commercial company)” category
• Improved access to capital and balance sheet flexibility
• Potential future fee generation opportunities for the company, leveraging the team’s expertise through joint ventures

The board added that the proposal was designed to reduce cost, deliver sustainable and growing earnings and ultimately help reduce the current share price discount to NAV.

[QD comment: We wonder whether the board has taken this decision in light of the cost disclosure rules on trusts and REITs that requires it to disclose expenses as if they are charged twice – therefore making them less appealing to investors than their listed property company peers that do not adhere to these rules. A fair resolution to the cost disclosure saga is urgently needed.]

It will be funded from the sales proceeds from the sale of its Tesco store in Newmarket for £63.5m, which was completed at a 7.4% premium to the 30 June 2024 valuation.

Personnel

Ben Green and Steve Windsor will remain as principals at Atrato Group, with Supermarket Income REIT being led by Rob Abraham (current fund manager and managing director, Supermarkets, at Atrato Group) as chief executive and Mike Perkins (current finance director, Supermarkets, at Atrato Group) as chief financial officer.

Abraham has been fund manager for the last three years and with the Atrato Group for six years. He joined from Lloyds Bank, most recently working in the loan markets business originating, structuring and syndicating debt facilities across corporate, funds and real estate sectors. He has 14 years of experience across real estate, finance, capital markets and investment, and holds the CFA designation.

Perkins has been finance director for the last year and provides financial, strategic, treasury and tax support to the company on behalf of Atrato Capital Limited. He joined from Logistics Asset Management LLP, the investment advisor to Urban Logistics REIT plc, where he was chief financial officer. He has 15 years’ experience within the real estate and financial services sector and has worked in listed real estate for over eight years. He is a Fellow of the Association of Chartered Certified Accountants.

Green and Windsor have agreed to a lock up (subject to customary exemptions) in respect of an aggregate of 4,819,294 shares held by them and their respective connected persons until 31 March 2026.

Other details

Atrato Group will receive an additional £0.3m for the termination of its AIFM agreement and, to ensure continuity of operations, Atrato will receive £0.8m for the provision of transitionary services for up to nine months post completion.

The internalisation will be subject to a voluntary shareholder vote. If the proposed internalisation becomes effective, the company will seek a transfer of its listing from the “closed-ended investment funds” category to the “equity shares (commercial companies)” category.

The board said that it expects that such a transfer of listing will reduce the administrative burden, provide greater operational flexibility, and potentially attract a wider range of investors and research analysts.

If shareholders vote in favour of the internalisation (general meeting has been set for 20 March), it is expected to take effect on or around 25 March 2025.

Comments

Nick Hewson, chair of Supermarket Income REIT plc, commented: “SUPR is of a scale and maturity where we believe an internalised structure is appropriate as the Company moves into the next phase of its growth. Alongside the other strategic initiatives that we have undertaken in recent months, it will reduce costs and deliver sustainable and growing earnings.

“The Board would like to thank Steve Windsor, Ben Green and the wider Atrato business for their invaluable contribution to the performance and growth of the Company over the last eight years. We wish the whole of the Atrato platform well for the future.”

Ben Green, principal at Atrato Capital said: “We are very proud of the growth of SUPR, a company which started with a single store in 2017 and is now a FTSE 250 constituent with 82 supermarkets in its portfolio. We recruited Rob and Mike into the business as potential future leaders and are delighted that they will have this opportunity to lead the internalised business into this new and exciting phase for the Company.”