Supermarket Income (SUPR ) has held out the prospect of share buybacks as the real estate investment trust (Reit) decides what to do with £380m of proceeds from the sale of its 50% stake in a portfolio of Sainsbury’s stores.

In half-year results to 31 December, the trust’s board committed to use the money, the first instalment of which it received this month, in the ‘most accretive way and will consider all options, which may include returning capital to shareholders and/or redeploying into supermarket real estate assets given current attractive levels of pricing,’ said the chair Nick Hewson.

The Reit bought eight stores for £299m in the third quarter but has sat on its hands since then as surging government bond yields - exacerbated by the storm over Liz Truss and Kwasi Kwarteng’s mini Budget - brought a painful repricing across the real estate sector. 

Supermarket Income saw the valuation of its 50 stores tumble 13.3% over the six-month period. That was better than the 19% capital fall in UK commercial property, which Atrato fund manager Ben Green said reflected the stability of the asset class and the appeal of its inflation-linked rents, 80% of which are tied to the consumer prices.

However, the effect of gearing - or borrowing - magnified the impact of the valuation falls, knocking 20% off the portfolio and reducing net tangible assets (NTA) to £1.15bn from £1.43bn. NTA per share fell to 92p from 115p at 30 June.

That left the trust’s assets on a 5.5% initial yield, up from 4.6% six months earlier, which Green thought was good value. ‘We think this is the bottom. Yields look pretty attractive,’ he said.

Despite the macro-economic impact of rising interest rates on the property valuations, the portfolio, which is three-quarters let to Sainsbury’s and Tesco, two of the stronger grocery chains, made good progress in the half year. 

A 36% increase in annualised passing rent and a 3.7% average annualised rental uplift coupled with supermarket revenues soaring as shoppers cut dining out in the cost of living crisis meant 3p per share of dividends were covered by earnings. 

Unlike Target Healthcare (THRL ), which this week cut its dividend target, SUPR said it was on track to deliver its full-year payout target of 6p per share. With the shares steady today at 86.5p, that puts it on a yield of 6.9%.

Numis analysts said they would not be surprised if SUPR used its cash pile to exercise an option to buy five Sainsbury’s stores from the reversionary portfolio that the chain is not repurchasing but will continue to lease.

Gavin Trodd and Colette Old said the shares traded at a narrow 2% discount to their current estimate of net asset value. That looks expensive compared to other long-lease Reits such as LXI (LXI ) which trades on a 25% discount below asset value, although it does not focus on supermarkets. 

Peel Hunt analysts also believed there was better value elsewhere as they marked the stock ‘reduce’ with an 85p price target, but flagged the potential for a return of capital as the Sainsbury’s cash was set to reduce borrowing with loan to value (LTV) falling from 40% to under 30% by July.

Stifel, a corporate broker to the trust, held its ‘buy’ rating, saying it liked the trust’s income generation and that ‘Supermarket Income is the only company in the sector where property values have fallen but so too is the LTV.’ 

The collapse of three regional US banks and the rescue of Credit Suisse by UBS last week have hit Reit shares in recent weeks on fears of a credit crunch as lenders cut their support of property developers. Green said SUPR was well placed, pointing to the refinancing of its loan facilities with German bank Bayerische Landesbank last week.