Justin King: take heed, Amazon proved value of ‘omnichannel’ stores

Former Sainsbury's boss, now adviser to Supermarket Income real estate investment trust, says property investors still haven't learned the lesson of Amazon's acquisition of Whole Foods Market two years ago.

Shares in the nation's leading grocers may be on the ropes but investing in the bricks and mortar of some of their most strategically placed stores is a great play on the sector, according to Supermarket Income (SUPR).

Launched two years ago the £257 million real estate investment trust (Reit) has invested in eight stores run by Tesco (TSCO), Morrisons (MRW) and Sainsbury's (SBRY).

These are large ‘omnichannel’ supermarkets playing a dual role in selling physical groceries and serving as online fulfilment centres where shoppers can pick up goods ordered on the Internet.

While shares in the three supermarket giants which rent its stores have dropped 5%, 29% and 37% respectively in the past year, Supermarket Income has notched up an 8% total shareholder return for the 12 months to 30 June.

This matches the return made in its first, previous 13 months from launch, underlining the steady and attractive returns from Supermarket Income's long, inflation-linked leases.

Like GCP Student Living (DIGS) - another specialist property fund that has this week reported strong results - the performance stands out in a UK Reit sector that fell 6% in the same period.

According to the company, in the two years since it floated shareholders have made a total return including dividends of 16.7% compared to a 1% decline in UK Reits.

Some of these gains reflect the strong demand for its quarterly dividends which grew 3.2% in line with inflation to give a total of 5.6p per share, covered 90% by earnings. 

The dividend target for 2020 has just been lifted to 5.8p to also reflect the rise in the retail prices index (RPI).

At nearly 107p today the shares yield over 5% but are considered expensive given they trade at a 12% premium over a 95.6p net asset value (NAV) depressed by acquisition costs.

Analysts at Winterflood believe the fund's concentrated tenant list and focus on one sector makes it vulnerable to a sector or company downturn.

'Nevertheless, we recognise Supermarket Income Reit's attractive income profile, with long-term, inflation-linked leases and a prospective yield of 5.3%,' they said.

Good stores are king

Including the purchase last month of a Sainsbury's store in Preston, Lancashire, Supermarket Income has spent £151 million on properties since June last year, part funded by an over-subscribed £45 million share placing in March.

Former Sainsbury’s boss Justin King, who joined Atrato Capital, the fund's manager, as a senior adviser this year, believes this is money well spent as he regards the sub-sector as undervalued.

Atrato points out that whereas the values of distribution warehouses have shot up in the past four years, depressing their rental yields compared to the rest of the marekt, supermarket yields have continued to trade above the UK all-market despite offering a similar online shopping dimension.

King said the property market still hadn't taken heed of Amazon's $13.7 billion purchase of Whole Foods Market two years ago, which he said was the 'most significant retail transaction in the last 10 years'.

'Amazon was not motivated by acquiring technology, it was a technology company acknowledging that a successful grocery business can only be achieved through well-located shops with great customer service, operating an omnichannel business model with a well-developed supply chain.

'It seems to me that the property market doesn't understand that when it comes to supermarket property as an investment class,' King said.

He said supermarkets still generated ‘significant cashflow’ and were at the core of grocery shopping.

‘If you look at the UK, the grocery sector is heading to be a £200 billion market and some 60%, or £120 billion, is still done on or fulfilled from a supermarket as part of a weekly grocery shop,’ he said.

‘That cash value is unchanged from 10 years ago.’

While online shopping platforms like Ocado offered convenience he said the ‘dominant’ shopping channel would remain the supermarket.

He said the line between online and in-store shopping was ‘already blurred’ as 75% of online grocery shopping is fulfilled from supermarkets acting as hubs, and just 6% of grocery shopping is done online despite millions in investment being pumped into it.

‘Pure play home delivered grocery has not been profitable, and I believe it is unlikely to ever generate sufficient profit as a standalone sales channel,’ he said.

King was also no longer worried by discounters Aldi and Lidl that had taken a chunk of the UK grocery market but he believed would struggle to grow much more.

He said their market share was similar to ‘previous discounters [such as Netto and KwikSave] as far back as the mid-80s’.

‘I believe discounters are now through the zenith of their expansion programmes and disruption in the UK,’ said Kind. ‘They will continue to keep pricing sharp, of course, but not result in further incremental disruption to market share.

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