Supermarket Income Reit (SUPR ) has entered into a joint venture with Blue Owl Capital, handing over a 50% stake in eight grocery stores in return for £200m and a management contract.

The £1bn portfolio of big-name grocery stores has entered into a 50:50 joint venture with US alternatives manager Blue Owl that will be seeded with eight supermarkets from the existing Supermarket Income portfolio, it was announced on Thursday.

These comprise of five Tesco supermarkets, two Sainsbury’s and a Morrisons, valued at £403m. In return, it has received £200m of proceeds from the sale of the seed assets – a 3% premium to book value – as well as signing a deal to run Blue Owl’s interest in the venture for 0.6% of gross asset value each year.

The trust’s management team, led by Robert Abraham, can also earn a performance fee if financial targets are met. Management of the trust recently moved in-house after Supermarket Income Reit ended its external agreement with Atrato and bought out the contract for £19.7m.

Supermarket Income and Blue Owl will use the joint venture as a ‘platform’ to buy more high-yielding supermarket assets. They are hoping to have the first refusal on pipeline assets which meet specific investment criteria, and ultimately intend to grow the spin-off to £1bn over the coming years.

The board explained that shareholders will benefit from earnings accretion through ‘redeployment of capital, ongoing management fees, and a potential performance fee’.

The £200m the real estate investment trust (Reit) will receive from setting up the joint venture will be used to pay down debt, taking the portfolio’s loan-to-value to 31% versus 39% at the end of December.

‘Through redeployment of capital, the company expects to operate at the upper end of its target loan-to-value range of 30-40%, which will include its share of assets and net debt in the joint venture,’ it said.

Back on track

Winterflood analyst Emma Bird said the deal ‘appears to be an attractive transaction’ for Supermarket Income.

‘The joint venture should also provide a strong platform for future growth, with shareholders benefiting from economies of scale as this occurs,’ she said.

Abraham said the joint venture represents Blue Owl’s first move into the UK grocery space.

‘For our shareholders, the joint venture is another important milestone in our strategy to recycle capital and grow earnings, and provides a platform for growth with specialist third-party capital,’ he said.

The Blue Owl deal is the latest in a long line of initiatives at the Reit, which recently renewed the three shortest leases in the portfolio to alleviate concerns about estimated rental values. It has also sought to cut costs, partly by bringing management in-house.

Supermarket Income currently trades at a 13% discount to net asset value (NAV) and yields close to 8%.

Deutsche Numis analyst Andrew Rees said the Reit potentially offers investors an attractive risk-adjusted return ‘underpinned by a portfolio of mission critical assets that are let with strong tenant covenants in the highly defensive grocery sector, and delivering compounding income growth’.

Over the past year Supermarket Income’s shares are up 15.4%, slightly ahead of a 14.4% gain by the AIC’s UK commercial property sector. Over three years, its shares are down 22.5% versus 25.3% by the average trust in the sector.