Supermarket Income REIT plc

Welcome to the Supermarket Income REIT Plc 2021 Full Year Results Investor Presentation. [Operator Instructions] The company may not be in a position to answer every question it receives during the meeting itself.

However, the company will review all questions submitted today and publish responses where it is appropriate to do so. I'd also like to remind you that this presentation is being recorded.

Before we begin, we would like to submit the following poll. And if you give out your kind of attention, we'll be most grateful.

And I'd now like to hand over to, [ if I may ], to Steve Noble. Good afternoon, sir.

Thank you, Mark, and good afternoon, everyone. My name is Steven Noble, Managing Director and Co-Founder of Atrato Capital.

Atrato Capital is the Investment Adviser to Supermarket Income REIT, which is the U.K.' s only real estate investment company, focused exclusively investing in U.K.

supermarket property. And I'm joined by -- with Robert Abraham, who's the investment manager looking after our Supermarket Income REIT.

I wanted to start by just giving a quick overview of the people behind the fund. So just to start with the Board of Supermarket Income REIT.

Nick Hewson is our Chairman, who is Co-Founder and CEO of Grantchester Holdings, and currently serves as Non-Executive Director at Redrow, which, of course, is one of the U.K.' s largest housebuilders.

Vince Prior was previously Head of Property at Sainsbury's, and helped grow their portfolio from GBP 7 billion to GBP 12 billion. Jon Austen is our experienced CFO; and we have Cathryn Vanderspar on our Board.

She is very much a grandee of the property tax world and has over 20 years of experience in real estate law. On the Atrato team, just to point out, Ben Green, he's Co-Founder and Principal of Atrato.

He's over 20 years of experience in structuring and executing supermarket real estate transactions. We think Ben has done more sale and leasebacks in this space than anybody else in the U.K.

And just the other notable name to pull out from our team is Justin King. Many of you know, Justin King was Chief Executive of Sainsbury's for around 10 years to 2014, and is currently a Non-Executive Director on the Board of Marks & Spencer.

Now to put that into perspective, we've put this team together to create a coverage model for this sector. And we aim to cover our tenants from the Board level, be it John Allan, Chairman at Tesco's all the way down to the individual store manager.

And that's designed to give us a deep understanding of the sector, but it's also designed to deliver an information advantage as well as a relationship advantage over our competitors in the space. Just to give you a quick summary of the fund and our financial highlights.

So this year, we deployed over GBP 600 million into the capital into this space. We have a current portfolio of GBP 1.3 billion.

Our portfolio increased in value by 8.5% during the 12 months to June. Our EPRA NTA currently stands at 108p, and we delivered just under 11% total shareholder return for the financial year.

Our dividend target next year is 5.94p, and off our current share price of around GBP 1.20. That's a dividend yield of 4.9%.

Just quickly to summarize our financial performance. I mean this page illustrates how we've delivered growth for shareholders, and how we've delivered persistently higher returns.

Top left, that chart shows the growth in our rental income over the last 5 years, as we've built our GBP 1.3 billion supermarkets portfolio. Top right, you can see that, that enables us to deliver inflation-linked dividend growth.

And we announced last week that we've yet again increased our dividend target in line with inflation. Bottom left, you can see that the growth from our acquisition since IPO in June 2017, as we've grown the portfolio from GBP 100 million to GBP 1.3 billion, but we're still growing our NTA, and it currently stands at 108p per share.

And finally, bottom right, we've consistently delivered on our target shareholder returns. So over the next couple of pages, I'm just going to take you through our investment strategy, and then I'm going to hand over to Rob, who will take you through our portfolio.

And in this section, we're going to explain some of the features around the strengthening U.K. grocery market and how our investment strategy is aligned with that to drive both income and growth in our portfolio.

So just starting with the 3 core pillars behind our investment strategy. So the first of those is lease length.

So we're targeting supermarket property with leases that have long unexpired terms with inflation-linked rental uplifts. Our weighted average unexpired lease term is currently 15 years, and that provides a high degree of certainty over our income, which, of course, grows with inflation.

The second pillar is around omnichannel stores. Now let me explain that.

So we're targeting stores that operate as traditional supermarkets, but also ones that operate as omnichannel stores. They're essentially stores, which also fulfill online grocery sales, both via home delivery as well as click and collect.

Now as more grocery sales are going online, how do real estate investors capture that growth? Well, we do that through omnichannel stores.

And we'll take you through the online grocery fulfillment later in the presentation. And the third, of course, is site size.

One of the benefits of investing in the sector is the size of the land we acquire alongside the supermarket on property. On average, our site size is 10 acres, and our store coverage ratio is around 25%, which reflects the large size of the car park you get on our sites.

And that's all we love about this asset class is that, that amount of land provides a lot of optionality for us to explore asset management opportunities in the future, as well as work with our tenants as their needs and their operational requirements change. Just a quick overview of the sector.

So right now, we continue to benefit from strong sector headwinds. We've seen a persistent uplift in grocery sales as operators approved highly agile in negotiating the impact of the pandemic, as well as adjusting to the channel shift towards online.

Now that's leading to record levels of investment in the grocery sector, both in the operators as well as the real estate. And we're seeing a very strong property market backdrop with yield compression, but still seeing plenty of accretive opportunities for investment in this space.

In terms of the sector, so to understand the trends in groceries, it's important to compare 2021 with 2019, which was the last full pre-COVID year and smooth out the spikes we've seen during the lock down. So firstly, you can see that the U.K.

grocery market is up 9% over 2019. And that growth represents the effect from the structural change we're seeing in working habits towards greater levels of home working.

Now second, you can see that the online grocery sector is generating record levels of growth, with the online channel now up 85% over 2019 levels. And third, the grocers are continuing to expand their in-store fulfillment capacity, with delivery slots up 110% relative to 2019 levels, with omnichannel stores now fulfilling over 80% of all U.K.

online grocery orders. Now omnichannel stores are capturing the lion's share of this U.K.

grocery growth, underpinning our view on further value and income growth in this sector of the market, and hence, our focus towards omnichannel stores. Just looking a bit more detail on online capacity.

As I mentioned earlier, the massive growth in demand for online grocery, well, that's been met by the operators through scaling up of their in-store fulfillment capacity since the start of the pandemic. Now in this graph, you see the weekly increase in the weekly online delivery slot capacity across individual grosses, represented here in the different colors, pre-COVID capacity in the shaded columns, and current capacity in the bold columns.

Now looking at the blue column, which is Tesco's, I mean what's staggering about this graph is the amount of additional capacity they were able to add through their store pick model. That's 150% increase in capacity.

To put it another way, Tesco's has grown its weekly delivery slots by 900,000 in a few months, which is twice the size of Ocado's total business. And you can see it's a similar story for Asda and Sainsbury's, all driven through store pick fulfillment.

Now this map shows Tesco's omnichannel fulfillment network across the U.K., all those blue dots representing omnichannel stores. You can see why they use stores as last mile fulfillment centers for online grocery.

It gives them a U.K. national coverage.

All those blue dots are what we are predominantly targeting under our investment strategy. Those red dots you see are their online-only centers, or what's known as dark stores in the industry.

And as you can see, they're all clustered in around London. The reason they use dark stores around London, of course, because London is one of the worst of the areas for supermarket.

They simply don't have the capacity in and around Central London. Now online grocery is profitable for the operators.

As online has grown from 8% market share to what it is now, which is 13% market share, where you can see how that was achieved through a rapid expansion of store pick fulfillment. Now that, in turn, has generated significant economies of scale for the operators.

The 2 graphs you see here, 2017 and '21, these 2 graphs represent grocery fulfillment cost per order in 2017 versus 2021 and splitting that between centralized fulfillment versus omnichannel store fulfillment. And as you can see from these graphs, in-store fulfillment cost has decreased from GBP 12 in order to around 7% -- GBP 7 per order.

That is a 40% reduction in costs. So what's driving that cost reduction?

Well, the reduction has been primarily due to increased deliveries per hour, which spread the online costs over a much greater number of orders. Now of course, that's only achievable if you're located close to your customers.

And hence, on average, omnichannel stores are located at roughly around within a 30-minute drive time distance from their customer. Now if you contrast that with a centralized fulfillment model, you have to drive a lot further from your distribution centers to your customer base, and that's the reason why centralized fulfillment costs have largely remained unchanged despite the acceleration of growth.

Now of course, the perception in the industry was the efficiency would come through the pick and pack operations, but as you can see from those graphs, actually, when it comes to online grocery and because of the challenge of online grocery logistics being that you can't shove it through people's leader box or leave it behind the bin, your customer has to be in to take delivery. And on average, they're targeting 1-hour delivery slots, where that requires proximity to our customer to make that viable.

And hence, you see the reduction in costs, primarily now because as capacity grows, we're starting to see the economies of scale come through. Now let me take you, actually, in terms of the investment we're starting to see in our stores.

I mean this is one of our Sainsbury's stores in Ferndown. And what you see here is the store's investment plan for its online capacity.

So the online distribution will grow from 8 vans to 22. You can see highlighted in yellow there is the new back-of-house dispatch facility, which has all the racking and the packing to support the home delivery logistics as well as click-and-collect.

And then in green, you can see the investment in the click-and-collect drive-through. That will have, for example, number plate recognition, which is all designed to make click-and-collect more efficient, more effective.

Now in terms of what does that do for the store? Well, you can see there that the pre-COVID capacity for that store would have been around 3,000 orders per week.

How is this investment in the store, that will grow to 7,000 orders per week? Now if you think of how our rents in this space determined, well, typically, rents on stores were around 4% in turnover.

And with the growth in capacity you're seeing from online investment, this has the potential to increase that store's turnover by around GBP 20 million per annum. And hence, the reasons why we love omnichannel stores because this is the future model of grocery.

This will drive additional revenue through each of our stores, and that in time will lead to a rental increase. It's a long way away for us because we've got, on average, 15 years lease length on our store portfolio.

This is why you can see we're predominantly focused on omnichannel stores and their integration with online grocery. I'm now going to hand you over to Rob, who will take you through our portfolio in a bit more detail.

Thank you, Steven. And also I'd walk through portfolio and update on our joint venture investment, along with some details of our current debt financing arrangements.

So as you can see here, we have carefully selected a high-quality portfolio, which is weighted towards long index-linked income. Top left, you can see, we now have a portfolio of 35 stores, generating 4.7% net initial yield, with a directly owned portfolio valuation of GBP 1.2 billion.

As shown bottom left, our income is weighted toward the U.K.' s leading and largest grocery tenants situated on top trading, omnichannel stores.

All our investments are underwritten by rigorous and detailed financial and property due diligence assessments. As shown top right, our portfolio is underpinned by long-term leases with a weighted lease length of 15 years.

And as shown bottom right, our portfolio benefits from high invisible rental growth being substantially weighted towards index-linked rent reviews, providing an attractive plan compounding income growth over the next 15 years. Taking all these factors together, you can see how we are delivering on our strategy of building a platform of high-quality supermarket assets, providing a strong foundation to our long-term income growth.

You can see through our portfolio map from June last year to today, it's been incredibly busy period of activity in which we have increased our direct portfolio by the GBP 700 million through 25 new supermarket acquisitions at an accretive yield of around 5%. The full impact of these acquisitions is very visible, increasing both our tenant and geographical diversification, as you can see through the varied colors on the map and the number of dots.

Turning next to the progress we have made on ESG initiatives. In the first column on the left, we've undertaken a materiality assessment to understand the key ESG topics for both management and other stakeholders.

To complete this, we have engaged investors, tenants and employees of the investment adviser to understand the issues that are most important to them. The output is the materiality image shown here that identifies the Top 8 most important items for both stakeholders and company leadership.

The metric showed a high level of correlation as to what was considered important. Moving to the second column.

We remain in active dialogue with our tenants by both asset management opportunities and also ESG-specific issues and initiatives. As you can see here, 70% of our portfolio is rated EPC C and above, and we only have one property with an E-rated, down from 3 this time last year.

Finally, moving on to governance. The company has been awarded an EPRA Gold governance award 2 years in a row.

And we have continued to work with the Board to enhance the governance framework of the company, which has included updating the terms of reference to the Audit Committee to include ESG oversight and conducting the skills assessment for the Board. As part of our ongoing ESG strategy, whilst we recognize that we cannot contribute to all year on sustainability goals, we have formally adopted 3 of these against which to fully align our sustainability efforts.

These are decent work in economic growth, sustainable cities and communities and climate action. I've already provided an overview of our direct portfolio, so I'll now take you through the joint venture portfolio.

As shown in the table on the top left of the page, our JV investment in the Sainsbury's Reversion Portfolio stores acquired 51% stake in 26 Sainsbury stores, owned jointly with our investment partner, British Airways Pension Scheme. Super's investment in the joint venture was GBP 108.5 million.

To summarize, bottom left, the portfolio is subject to 2 securitization transactions, which began in the early 2000s. The Highbury securitization consisting of 16 stores and the Dragon securitization consisting of 10 stores.

Both structures expire in 2023. Sainsbury's holds a purchase option in each store in both structures, the last of which expires in January 2022 for the Dragon structure.

The completion settlement of all the purchase options takes place in March and June 2023, respectively. Through our due diligence on the portfolio, we identified that these are high-quality nature stores and their underlying importance for Sainsbury's.

We announced earlier this month that Sainsbury's has exercised its option to buy back 13 of the stores in the Highbury securitization. We will receive the sale proceeds in March 2023.

Sainsbury's options to purchase further 10 stores in the Dragon securitization, which can exercise between December and January. The option price assumes a fresh 20-year lease to Sainsbury's.

And given yields on 20-year supermarket leases are tightened materially, this will be positive for the NTA of Super. The current leases will continue on all the stores until expiry, so Super will continue to earn its running joint venture return until mid-2023.

The running return from the joint venture investment is GBP 12 million per annum or 11% annual return on our equity investment. And finally, just to note, the Sainsbury's purchase option was given post balance sheet, and therefore, it's not reflected in our June valuation numbers.

Just moving on briefly to our funding position. So as you can see, we have continued to benefit from borrowing costs with our interest cost reducing to 1.9% during the year.

And on a pro forma basis, that increased further to 1.8%. Shown here, we've also further diversified our banking group with Barclays, Wells Fargo and RBC, [ all ] at it during the year.

And we've also post balance sheet undertaken utility increases and extensions to improve both the wall and the scale of our facilities. In this next section, we'll explain some of the features of the U.K.

grocery real estate market, and how this relates to our investment strategy.

I'll take that one. Thanks, Rob.

So I guess, look, it was quite frustrating for us not to have a representative transaction yield series in the market. Now what do I mean by that?

I mean the types of assets that we're targeting, which is long-leased supermarkets with inflation-linked rent reviews. Now we've been tracking that since 2016 when we originally devised the idea of the funds.

What you see here in that graph is those blue dots. They represent individual supermarket transactions, which have over 10 years unexpired lease terms that benefit from inflation-linked or fixed uplifts.

Now just to be clear, this is the whole market. This is not just Super's transactions.

Now what you're going to see there is that those -- the number of blue dots is increasing and yields are tightening. Now that reflects the growing level of investment interest in the sector.

Now of course, by doing that, we can create a yield series. It's a rules-based transactional yield series, and that's what you see in the green line.

Of course, investment yields have tightened from an average of 5.3% to 4.5% in 2021. Now that illustrates the impact on investment values from increasing levels of investment market.

And just to be clear, that green line is effectively a line of best debt through those transactions. Just to be clear, we're also going to make this data available on our website, so you'll be able to go on to the Atrato Capital website and download our yield series, and we track this going forward as well.

Now of course, the great thing about our market is we can also show the differential between supermarket property yields and bond yields. So when adding the yield on Tesco's corporate bonds, which we've done here on that blue line, you can see that despite the yield shift on supermarket property, the relative value from supermarket real estate significantly improved.

That's now a 2.2% differential. And remember, with our supermarket leases, we're just under 90% inflation-linked on the entire portfolio, as Rob took you through earlier.

So we even get the benefit of the inflation protection on top of that 4.5% net initial yield. So on a real basis, that 2.2% is even larger because of the inflation protection.

I mean on a risk-adjusted basis, our investment strategy has never looked more compelling than it does today. Just to quickly take you through who's buying and who's selling in this space.

I mean over the last 3 years, it's quite a liquid market. We've seen over GBP 5 billion of transactions take place.

And what you're seeing in the market, especially for supermarket, is there's a rotation of capital taking place, which is out of generalists, property funds into specialists. And hence, you can see generalist names there such as British land, Aviva, Aberdeen, et cetera.

I mean they're forced to sell sometimes because of liquidity needs. A lot of supermarkets, of course, rightly or wrongly, are put into a retail bucket.

And when they're forced by their investment committees to reduce their exposure to retail, obviously, the one good thing they can sell is supermarkets. And of course, on the buy side, you can see there's Realty Income, which is a large U.S.

REIT. They moved into the U.K.

supermarket sector, again, looking at the fundamentals we have. The ultimate insider on that list, of course, is Tesco.

I mean they've looked at that relative value curve that we've been looking at and that I showed you on the last page. And yes, they realize they can fund and buy back property at what is effectively accretive returns to them because they can fund below 3%, but they can buy their stores back at more than 4%.

Just to give you an update on what's been taking place also in the wider sector. I mean in many ways, 2021 has been an exceptional year for U.K.

grocery. Private equity players, of course, have been attracted to buyouts in the sector.

And -- well, why? I mean it's not hard to understand.

I mean grocery is mission-critical in terms of its -- the underlying grocery assets. All of the operators have significant real estate backing in their portfolios.

They're highly cash-generative together with agile business models. And they have dominant market shares.

Now how do we think about all of this by activity taking place in the market? I mean grocery real estate is core food infrastructure.

And asset selection in this space is critical. We use our information and relationship advantage in order to acquire high-quality stores with growing sales, both in-store as well as online and, hence, are focusing on omnichannel.

And that, in turn, provides a strong foundation for our long-term income growth as well as value growth within the portfolio. Now just to add, we don't expect to see any significant sale and leaseback volumes coming through the market.

I mean given -- and that's primarily given the low-cost nature of debt finance in the sector. As you saw previously, debt is considerably cheaper than property yields.

For example, if we look at Asda, which is now owned by EG and TDR, their bonds are currently trading at 3.1%, which is well below property yields. So we don't expect to see a change in the supply and demand dynamics anytime soon.

And just to summarize in terms of our overall outlook for the sector, sustained grocery sales growth that we've seen now the lockdowns have ended, we don't think that's going to go away. And that's broadly flattened out.

And hence, you see the 9% increase over 2019 levels. Omnichannel real estate will remain key to the operator's overall property portfolios, and that's because of the nature of how last mile fulfillment and optimizing online grocery deliveries requires a store-based fulfillment model.

We will have more news on our joint venture structure that Rob took you through earlier in January when the final option date for Sainsbury's purchase options is due to mature. So we'd expect more news on that in January.

And of course, the last point to note is that given the rates of inflation we're currently seeing in the U.K. economy, we're going to see that feeding through to our rents certainly over the next 12 months.

A feature of this sector is that our inflation-linked rent reviews generally look back about 6 months, so a lot of the higher RPI inflation we've seen in September, October, November, well, that will feed through over the next 6 to 12 months. At that point, we'll pause there and take questions.

I think I'm going to be question compass.

[Operator Instructions] Steve, Robert, obviously, investors have the ability to submit questions throughout this presentation. If I could ask you to open up the Q&A tab on the right-hand side of the screen.

Again, if I could ask you to read out the question, who is from and give a response where it's appropriate, we'll be most grateful. And I'll pick up from you at the end.

No problem. Thanks.

So if we start with Michael W. Could you please explain the rationale for some smaller lot sizes included in the recent bundle of purchases?

Is this likely to be an element you're looking to expand? Rob, I'll let you answer that.

Yes. Thank you.

Thanks for the question. So what I'd say there is we're only to be more representative of the U.K.

grocery market. And in doing so, you may have seen the Aldi acquisitions recently.

We also acquired our first M&S food store. And those operators typically use smaller format stores and now it is typically a 20,000 square foot store.

They do -- in fact they do click-and-collect. But they're a different model to our large-format stores in the likes of the same reasons Tesco's with the large home delivery operations that Steven talked you through earlier.

And so as a result, they naturally trader a lower value. There are more of them.

So there's a larger supply, and it's a slightly different model. However, I'm sure you'll be aware that it's still a successful model for the discounts and the likes of M&S food, and those other operators.

So yes, it is something we will -- when the right opportunities are there, we will continue to add to the portfolio. As we go along this, there's a role to play, and it is being more representative of the U.K.

market, but we also will continue to acquire our larger format, home delivery operation, omnichannel stores with the likes of Sainsbury's, Tesco, Morrisons and Asda.

And I think it's a good question, Michael. I mean our ambition over time is to reflect the U.K.

grocery market. So it will be a feature of future acquisitions.

But as Rob said, the U.K. grocery market is primarily weighted towards the big 4.

So omnichannel and the big 4 grocers will always dominate our overall portfolio. Now I'll just turn to a question that came in from Michael S.

Why not finance future growth by issuing a fixed coupon bond rather than using ordinary shares, which offer inflation-linked dividends? I mean it's a good question, Michael.

I'll let Rob take that 1 and take you through our loan-to-value policy.

Yes. So our long-term leverage ratio is around 30% to 40%.

So there's always a range within which we'll target longer term. We are able to take that higher.

And I noticed there was another similar question around our debt maturity and arrangement fees, which I think ties in. The 2 funding sources that are ultimate and complementary, we've grown through bad debt so far.

We are exploring opportunities to move into an unsecured longer-term bond issuance. We've engaged both banks and also debt advisers to explore that and are having an advanced stage discussions around that.

And that would see us issue bonds at potentially more closely aligned to the roots on our leases, and therefore, would naturally be a good fit. That, however, we grow through bank debt so far, that's worked very well for us.

The banks are very supportive when we achieve low funding costs, but there's benefit of issue -- issuing some longer-dated bonds. But ultimately, a Steven said, we'll always be aiming to keep the LTV on a longer-term basis below that 40%.

Then [ therefore, ] there will always be an element of debt required rather than just pure equity.

Thanks, Rob. I will take the next one from Greg.

Assuming Sainsbury's exercise, its rights to buy the Super-BA pension JV out of Sainsbury's sites, what loss of income would this represent to Super? That's a good question, Greg.

If I may, I'll turn to a slide we have in the appendix anticipating this. So look, overall, as Rob said, the joint venture investment we have, I mean, on a pro forma run rate basis, the EPRA earnings we have from the JV is about GBP 12.3 million, which you can see here in our 12-month pro forma numbers.

We acquired our initial stake in June. Hence, that was quite low.

We upsized our stake. And hence, that coming through in the financial year to June '21 was GBP 6.6 million of earnings.

On a full 12-month run rate basis, our investment generates GBP 12.3 million. Our costs to acquire our stake in the joint venture was GBP 108 million.

So that generates a return on capital about of 11%. It's quite accretive.

Because it's 11% return on capital as opposed to what you saw on the yield curve, which is around 4.5% to 5%. I mean in 2023, around mid-2023, Sainsbury's will execute its -- the buyback that exercised will happen, at which time, we'll get that money.

That cash will flow to us. And then we'll make a decision at that time whether or not we reinvest that capital or whether we'll return that to shareholders.

Between now and then, we will continue to earn the income from the JV. Everything continues unfrustrated, if that makes sense.

So for us, we'll continue to get the 12.3%. And it was the reason for entering into the JV was primarily because of that returns potential that we've seen.

It was a really good, high-quality portfolio of 26 Sainsbury's store. It's quite yield accretive, generating an 11% return on capital.

I think it's no great surprise that Sainsbury's have chosen to buy those stores back. You'll see it's been a core part of Tesco's strategy to buy back freeholds.

So in that respect, it's similar. And over the next 12 months, we'd be formulizing the exact price on Sainsbury's buyback.

We think that will generate returns on the upper end of our scale. That will be agreed over the next 12 months.

Hence, we're not guiding the market towards any specific numbers, but we do think it's going to be accretive overall to NTA. Just looking at the next question.

How is your acquisition pipeline looking? Rob, well, I'll let you take that one.

Yes. So I think it's worth saying that we see -- are seeing [ 63 ] of the active participants in the market, the vendors and purchases there.

We -- yes, I think it's fair to say we see virtually everything that comes to market. So the pipeline is kind of always quite healthy.

We spend -- spent a lot of time talking to those key participants, the current owners of properties, where if we have a conversation in 6 months ago, there wasn't something to sell quite often, we'll have a conversation after that. And the vendors' position have changed.

So we're very active in keeping that dialogue going. We're obviously known as one of the largest purchasers of supermarkets.

So if you're a vendor, at the moment, we are [ one of that ]. The first names they call with an opportunity, so yes, we continue to see accretive opportunities to buy.

And given our funding position at the moment has improved, that means that we're continuing to be able to buy a yield. Our breakeven yield now is roughly around the 4.3% to 4.5% range.

And that means we're still able to buy the very best quality of stock in the market. So pipeline for us remains healthy.

Yes. Big picture, overall, I mean, U.K.

supermarkets as a portion of overall U.K. commercial real estate is around GBP 100 billion.

So it's a fairly big market size, which should expect because supermarkets are pretty much sold at right across the U.K. Of course, 50% of that is on the balance sheet of the operators themselves.

So we think there's around GBP 50 billion sitting in leasehold estates. We're only targeting upper quartile stores.

We're only targeting omnichannel stores. So that means our addressable market is around GBP 30 billion.

I mean if we can be 10% of that market, then that can get us to a kind of a $3 billion total portfolio size. Just looking at the questions.

I have [indiscernible]. Thanks for your question.

Slide 16 seems Waitrose has been a big driver and increased insights and locations. Is there any particular reason for the increase in activity with this tenant?

I mean it's a good question. Thanks for that.

It is, in terms of the number of stores. They were slightly smaller stores.

As you know, Waitrose exited its relationship with Ocado because they decided that store-based fulfillment was far more economical than Ocado's model. So they began investing quite heavily in converting their stores into omnichannel stores.

We were lucky enough alongside London metric to participate in a certain leaseback program that they did in order to generate capital to invest in those stores. So hence, we acquired those Waitrose stores in our portfolio.

I mean they're absolutely fantastic trading stores. They're now supporting Waitrose online fulfillment through both click-and-collect and home delivery.

So we were delighted to pick those up. That's the growth you're seeing in the Waitrose tenant.

It was another question on debt, which I think Rob has answered. So we'll turn to the next one.

Have we considered hedging the credit risk of our major tenants using the derivative market? I think I can take that one.

I mean look, CDS spreads are quite visible. But for us, the attraction of investing in this sector is to providing a specialist investment vehicle for investors to capture the relative value growth that we've seen in the market.

So if you look at where bonds are trading relative to supermarket property yields, that's essentially the core of what we're offering to the market. So we'd never look to hedge out that risk using the CDS market.

We keep an eye on it. Some of us within the fund are ex-bankers.

So we're well aware of the CDS market, but it's not something we're going to look to pursue.

Well, I may be pick up just quickly because it's -- well, So Matt Gess' asked, are Realty Income is still actively buying in the U.K.? Short answer to that is yes.

You'll see in the property price. I think one of the most recent ones announced was Sainsbury's [indiscernible] down in the South Coast.

Again, I'd say we see everything that we obviously are quite optimist. It's just the case of us maintaining discipline.

It's not one that fits for us or we think the pricing is going beyond the level that is supportable on returns basis.

Right. I will take the next question from Todd S.

have you been approached by private equity to sell properties? And what progress have you made in terms of installing solar panels?

I mean I'll take the first one. In terms of being approached to sales stores, I mean, again, we're in the business of acquiring assets in order to provide investors with the opportunity to invest in this sector through our fund.

We always look at values. We always look at the portfolio.

In time, if we thought there was a lot of value, we might consider sales. But at the moment, we haven't been explicitly approached by private equity either.

In terms of solar panels, I mean, that's a really good question. So we're committed to installing green energy across our real estate in the form of rooftop solar.

And to understand that, I mean, rooftop solar at its peak generation, rooftop solar will provide on-site decarbonized energy that equates to around about 90% of the operators need during its peak power generation. So it's absolutely something we're in the process of doing.

We will sell the power those panels generate back to the operators. Of course, that will be under long-term agreements that coincides with our long-term leases.

We started that quite some time ago. I think it's fair to say we've been slightly disappointed on the progress, installing solar panel over the rooftops, has a degree of specialism, which exceeds buying property.

But we've been expanding our team quite progressively. We've done 2 big hires in the space within a trial to help us build out that program.

We're exploring more the use of third parties to help us accelerate the program. So it is something we're absolutely intent to do right across our portfolio.

I'll just let Rob take the -- a question from Alan around unsecured funding and what are the advantages?

Well, the question is, if so, what's the disadvantage? I'll take both because I think it's a good point.

So currently, our funding structure is also secured bank debt, [ so securing an ] individual properties. And so each one lenders will have a pool of properties as collateral for lending.

There's -- the advantages to that are the banks understand it and can provide quite attractive pricing and reasonably good tenures for bank debt. The downside of that is the inflexibility.

So we have to do a lot of additional comp and [ care legal ] costs and due diligence process for the banks and additional valuations. And your tenure is effect to recap at 7 years with back debt.

In the unsecured bond market, there's some additional costs that are going down at Group. You have to pay the ratings agencies costs both on initiating rating on an organic basis.

But the advantage is a much greater and greater flexibility. So there's no secured funding on individual assets.

You have much greater flexibility as to what you do with your assets, and also can achieve longer tenures that are quite often price, not too dissimilarly to the shorter-dated bank debt. So there's some upside there, which is the reason we're exploring those bond issues.

But again, we're absolutely weighing up the advantages and disadvantages of [ private ]. And of course, it will be effectively a risk-based decision as to which way we go down and the conversations we're having at the moment.

And a question for Michael on the JV. Can you say anything about the characteristics of 3 Highbury stores?

Sainsbury's have not elected to buy back? And a follow-up question, do any of the properties in the Dragon fund structure, share similar characteristics?

I mean I'll take the first one there, Michael. I mean I wouldn't read too much into the 3 stores.

They haven't exercised their purchase option. Of course, Sainsbury's are operating within a budget.

Those 3 are not part of the buyback, but that doesn't mean to say they're not part of the leasehold strategy for Sainsbury's. As you know, it's still relatively early.

They've exercised their options. We're discussing those 3 stores.

For us to have 3 stores in the structure, which could transition into long lease opportunities is obviously very good for us. We like the stores within the portfolio.

So if they come in the form of a leasehold structure, then that will be good for us. In respect to the Dragon properties, yes, absolutely.

All of the 26 stores in the portfolio share similar characteristics in that. They're predominantly omnichannel, and they were some of Sainsbury's best trading stores in their portfolios.

To give you a feel for that, we think the entire portfolio of 26 stores, that represented around 7% of Sainsbury's total U.K. sales, but around 4% of their actual store footprint or net sales area footprint.

So it shows you the weighting towards the upper quarter of trading on the stores. Hence, you can see why they were so important, and hence, the reason they've chosen to exercise their buybacks.

I think that's broadly us on the questions, unless there's any last few that come through. I think we're pretty much there.

Steven, Robert, thank you very much indeed for answering all those questions, and indeed to the investors that have taken the time to submit those questions. If any further do come through, obviously, we'll make these available to you, should you need to review those will, as they'll be available to you.

Steven, and Robert, I know investor feedback is important to you, and we'll shortly redirect the attendees on this call to let you have their views and expectations. But I guess, before doing so, if I could just ask you for a few closing comments just to wrap up with.

And then, as I said, I'll direct the attendees to give you their feedback.

Yes. No, thank you very much.

We're always happy to answer any questions. So if there is any follow-up, please feel free to contact us.

We have a wealth of information on Super's website. Also on Atrato's website, we did produce a specific piece of research around the fulfillment costs of online grocery, and why we're seeing omnichannel stores have a competitive advantage in terms of the fulfillment costs, and why the grocers are using stores as last more fulfillment centers.

That's available on both the Super's and Atrato's website. If you have any trouble finding that let us know, that that's well worth a read if you want some more details around the sector.

That's great. Thank you very much indeed to you both for updating investors and attendees this afternoon.

And could I please ask attendees to close the session. This will now automatically redirect you for the opportunity to provide your feedback in order the management team to really better understand your views and expectations.

This will only take a few moments to complete, but I'm sure will be greatly valued by the company. On behalf of the presenters this afternoon, I'd like to thank you very much for attending today's presentation.