SUPR Supermarket Income Reit Plc

·      Record £2.1 billion of investment activity in UK grocery real estate in 2023⁷

·      Our largest tenants Tesco & Sainsbury's gaining market share⁸

o  Combined market share up by 2% to 44%

o  10% growth in sales from large format stores⁹

·      Store sales growth continues to outpace rental growth - increasing affordability of rental values

Unique portfolio of 55 mission critical supermarkets

·      Future-proofed portfolio of omnichannel stores

·      13 years weighted average unexpired lease term ("WAULT")

·      78% of rental income inflation-linked

·      Strong performing tenant covenants with 77% of income from Sainsbury's and Tesco

·    93% of portfolio stores operate online fulfilment via home delivery and/or click and collect, capturing current and future growth in online sales

Supermarket property valuations reflect broader property market values

·      Portfolio independently valued at £1.68 billion, inclusive of acquisitions of £36.4 million, reflecting Net initial yield ("NIY") of 5.8% (30 June 2023: 5.6%)

·      Like-for-like valuation decline of 3.2% compares favourably versus MSCI All Property Capital Index decline of 4.0%

·      The impact of higher yields has been partly mitigated by a 3.6% average rental uplift on rent reviews during the period

Strong balance sheet with 100% of drawn debt hedged to fixed rate

·      LTV of 33% as at 31 December 2023 (30 June 2023: 37%)

·      100% of drawn debt fixed or hedged at a weighted average finance cost of 3.1% (30 June 2023: 3.1%)

o  Interest rate hedging extended by 12 months in September 2023

o  Existing in-the-money hedging restructured to extend hedge term at zero upfront cost

·      Fitch Ratings Limited ("Fitch") reaffirmed the Company's Investment Grade Credit Rating of BBB+

Accretive acquisitions and active portfolio management

·      Purchased two supermarket properties at a NIY of 6.5% for a total consideration of £36.4 million

·      Given reduced LTV, the Company has capacity available for opportunistic acquisitions

·      EV charging installations now operational at five stores

·      Rooftop solar:

o  Operational across 20% of the portfolio

o  New solar installation at Tesco, Thetford generated an EPC upgrade from C to B

Continued progress on sustainability reporting

·      Science Based Targets initiative ("SBTi") net zero targets submitted for validation

·   Adopted a charitable giving policy focused on alleviating poverty and hunger as well as having a positive impact on biodiversity at and near our sites

·      Post Period end, Atrato Group became an endorser of Spring - a new PRI stewardship initiative for nature

Nick Hewson, Chair of Supermarket Income REIT plc, commented:

"The UK grocery sector continues to demonstrate strong resilience to the challenging macroeconomic environment. Our tenants continue to grow, strengthening their financial and operational performance by putting omnichannel supermarkets at the heart of their operations.

We remain focused on our investment strategy of acquiring and managing a high-quality portfolio of omnichannel supermarkets, which are critical to our tenants, giving us exposure to the largest and fastest growing segment of the grocery market.

A record £2.1 billion was invested into UK supermarket property in 2023, highlighting the strong appeal of the asset class and the attractiveness of current asset values. UK property valuations continue to be impacted by the uncertain economic backdrop, however as interest rates normalise and with the limited supply of omnichannel supermarkets, we remain highly optimistic for the valuation outlook for the year.

Looking forward, the quality of our unique supermarket portfolio and the increasing affordability of grocery rents, together with our strong balance sheet means we are well positioned to deliver long-term value for our shareholders."

PRESENTATION FOR ANALYSTS

The Company will be holding an in-person presentation for analysts at 08.30am today at FTI Consulting's offices, 200 Aldersgate, Aldersgate Street, London, EC1A 4HD. To register to attend in-person, please contact FTI Consulting: SupermarketIncomeREIT@fticonsulting.com. There will also be a webcast available. To join the presentation via the webcast, please register using the following link:

·      July 2023: Two Sainsbury's superstores in Derby, for £19.0 million¹⁸ and Gloucester, for £17.4 million¹⁸, at a blended NIY of 6.5%. The stores had a 10-year unexpired lease term, subject to 5-yearly, upwards only open market rent reviews.

Valuation reflects transactions closing late Q4 which priced in higher long-run cost environment  

Cushman & Wakefield valued the Portfolio as at 31 December 2023 in accordance with the RICS Valuation Global Standards. The properties were valued individually without any premium/discount applied to the Portfolio as a whole. 

The Portfolio value was £1,675 million, with this valuation reflecting a net initial yield of 5.8% and a like-for-like valuation decline of 3.2% for the Period.

The decline in valuation reflects the outward shift in property yields applied by valuers as a result of transactions which completed in late 2023, having priced in Q3 amidst expectations of higher long-run costs. The valuation decline has been partially mitigated by our contractual inflation-linked rental uplifts. The average increase in rent from rent reviews performed during the six month period to 31 December 2023 was 5.1% (or 3.6% on an annualised basis). 80% of the Company's leases benefit from contractual rental uplifts, with 78% linked to inflation and 2% with fixed uplifts.

The benchmark MSCI All Property Capital Index during the same period was down 4.0%. Since the Period end we have seen signs of increasing investor interest as the forecast cost of debt begins to fall and with current supermarket yields producing attractive returns.

Active asset management delivering additional value and improving sustainability of sites  

We continue to seek to deliver additional value for shareholders through active management of our larger sites which are not fully demised to the core supermarket tenants and therefore benefit from greater landlord control.  

At Tesco, Chineham, McDonald's has commenced fit out works of a unit with a new 25-year lease. In addition to this, Pets Corner is upsizing into a new unit. At Tesco, Bradley Stoke, works are currently being undertaken to amalgamate two units, one of which was vacant at acquisition and the other let on a concessionary basis, with B&M committing to a new 10-year lease, rendering the site 100% let.

Opportunities to add complementary discount grocery operators have progressed. At Tesco, Chineham, the existing planning consent was successfully implemented and terms are agreed with a complementary discount grocery retailer. Other developments are being considered at Sainsbury's, Newcastle, Morrisons, Workington and Tesco, Bradley Stoke and various negotiations are ongoing with potential tenants for those sites.

Progress has also been made on sustainability initiatives at our sites. Electric Vehicle ("EV") charging has been completed at five sites. 58 EV charging bays have been installed at zero capex cost to the Company across:

·      Morrisons, Workington

·      Morrisons, Wisbech

·      Tesco, Bradley Stoke

·      Tesco, Chineham

·      Tesco, Beaumont Leys

We continue to assess the portfolio for other EV charging installation opportunities with three immediate targets already identified.

Works were completed at Tesco, Thetford in partnership with Atrato Onsite Energy plc where Tesco entered into a 20-year Power Purchase Agreement ("PPA") for a new solar installation on the rooftop at the store. The EPC rating was re-assessed post installation and improved from a C to a B.

Delivering on our sustainability strategy

The Company has continued to deliver on its sustainability strategy and improve its ESG performance. The Company is pleased to have now progressed from a Net Zero ambition to submitting science-based emissions reduction targets to the SBTi and embarking on their delivery. The Company's targets, currently submitted to the SBTi for validation, include:

-       Net-Zero: A commitment to reach net zero Greenhouse Gas ("GHG") emissions across the value chain by FY2050

-      Near-term Target: A commitment to reduce absolute Scope 1 and 2 GHG emissions by 42% by FY2030 from a FY2023 base year

-       Long-term Target: A commitment to reduce absolute Scope 1, 2 and 3 GHG emissions by 90% by FY2050 from a FY2023 base year

The Annual Report and Accounts for the year ended 30 June 2023 included the Company's Task Force on Climate-Related Financial Disclosures ("TCFD") report, with disclosures made across all 11 TCFD recommendations. Included within this report was the Company's GHG Inventory disclosures, across Scope 1, 2 and 3 emissions. As part of the Company's commitment to further developing its mechanisms to identify, manage and respond to climate-related risks, TCFD and climate risk training was rolled out to the Investment Adviser and completed by the full team in December 2023.

The Company's approach to sustainability is underpinned by the Board's commitment to good stewardship and creating long-term value for our stakeholders. The Company continues to support the commitments of its Investment Adviser as a signatory to both the United Nations Principles for Responsible Investment ("UNPRI") and Net Zero Asset Managers Initiative ("NZAM"). The Investment Adviser received the results of its first PRI Report submission in January 2024 and will be reporting on its responsible investment activities again in the next PRI reporting cycle. In January 2024, the Investment Adviser also became part of the first cohort of endorsers of Spring - a PRI stewardship initiative for nature.

The Company continues to monitor the evolution of relevant ESG-related regulation, specifically the implementation of the Financial Conduct Authority's UK Sustainability Disclosure Requirements ("SDR") and the European Commission's review of the EU Sustainable Finance Disclosure Regulations ("SFDR").

The Company's Board and the Investment Adviser recognise the importance of transparent, decision-useful sustainability reporting to improve our accountability to stakeholders. The Company's next annual Sustainability Report will be published alongside the Company's Full Year Results. The Company remains committed to further development of its sustainability strategy and priority ESG activities, as it continues to integrate ESG best practice and contribute towards a net zero future.

Post Period end, the Company adopted a charitable giving policy focused on the themes of alleviating poverty and hunger, feeding the nation, and having a positive impact on biodiversity at and near our sites. The Investment Adviser has also formalised a volunteering programme and its employees have given their time to support these themes. The Company will report on progress with the implementation of the charitable giving policy and volunteering impact within its next annual Sustainability Report.

Financial results

Net rental income

In the Period, the portfolio generated net rental income of £52.6 million (six months to 31 December 2022: £45.9 million), representing an increase of £6.7 million or 14.5% compared to the prior period.

On a like-for-like basis, EPRA net rental income increased by 2.5%. During the Period we successfully completed 13 rent reviews generating £1.7 million of additional rental income, representing an increase of 5.1% (or 3.6% on an annualised basis).

The second half of the year will benefit both from a full period of rental income from properties acquired in the Period and contractual uplifts across 27% of the portfolio subject to a review in the six months to 30 June 2024.

Direct property expenditure increased marginally to £0.4 million (six months to 31 December 2022: £0.3 million), however our gross to net margin continues to be among the highest in the sector at 99.3% (six months to 31 December 2022: 99.4%), reflecting the strength of our core single-let strategy and further highlighting the covenant quality of our tenant base.

Rent collection rates were 100% for the six months to 31 December 2023 (six months to 31 December 2022: 100%), as our focus on top trading stores and covenant quality provided exceptional income security.

Administrative and other expenses and EPRA cost ratio

Administrative and other expenses, which include all operational costs of running the business, remained broadly flat period-on-period at £7.6 million (six months to 31 December 2022: £7.9 million). We continue to monitor the operational efficiency of the Group through its EPRA cost ratio, which is among the lowest in the sector, and improved by 160bps to 15.1%.

Net finance costs

During the Period, the Group received £135.1 million following the divestment of its interest in the Sainsbury's Reversion Portfolio Joint Venture. Part of the proceeds were utilised to pay down debt, reducing drawn debt by £84.4 million to £587.8 million at the period end. At the same time, the Group extended the term of its hedging by 12 months, fixing the weighted average cost of debt on drawn balances at 3.1%.

Net finance costs reduced by £1.5 million primarily due to one-off loan restructuring costs recognised in the prior period.

Adjusted earnings

The Directors consider Adjusted earnings a key measure of the Company's underlying operating results, and therefore excludes one-off items which are non-recurring in nature and includes finance income on derivatives held at fair value through profit on loss. Adjusted earnings for the six months to 31 December 2023 were £36.3 million (six months to 31 December 2022: £36.4 million). On a per share basis, adjusted earnings remained flat in the Period at 2.9 pence (six months to 31 December 2022: 2.9 pence) per share.

A full reconciliation between IFRS and Adjusted earnings can be found in note 10 of the Financial Statements.

Dividend

In August 2023, the Company paid a fourth interim dividend in respect of the period from 1 April 2023 to 30 June 2023 of 1.50 pence per share, taking total dividends paid and declared in respect of the financial year ended 30 June 2023 to 6.00 pence per share.

In November 2023, the Company paid a first interim dividend in respect of the period from 1 July 2023 to 30 September 2023 of 1.515 pence per share and in January 2024 approved a second interim dividend of 1.515 pence per share for the three months ended 31 December 2023.

The Company is continuing to target a dividend of 6.06 pence per share in respect of the year ended 30 June 2024.

EPRA net tangible assets and IFRS net asset

EPRA net tangible assets ("EPRA NTA") is considered to be the most relevant measure for the Group, and includes both income and capital returns, but excludes fair value of interest rate derivatives and revaluation to fair value of investment properties held at amortised cost.

At 31 December 2023, EPRA NTA was £1,094 million (30 June 2023: £1,157 million), representing an EPRA NTA per share of 88 pence, a decrease of 5.4% since 30 June 2023 primarily due to the portfolio revaluation deficit of £57.9 million or 5 pence per share.

Portfolio Valuation

The value of the portfolio at 31 December 2023, including the fair value of investment properties held at amortised cost, was £1,675 million (30 June 2023: £1,693 million). During the period, the Group invested £38.4 million in two omnichannel supermarkets (including transaction costs) and incurred capital expenditure of £0.1 million. On a like-for-like basis, the portfolio recognised a revaluation deficit of £54.4 million, or 3.2%, as a result of 20bps outward yield shift.

Cash Flow and Net Debt

Cash flows from operating activities before changes in working capital increased by £6.9 million to £43.6 million, primarily due to increased rental income received from rent reviews and property acquisitions.

During the Period, the Group received £135.1 million following the divestment of its interest in the Sainsbury's Reversion Portfolio Joint Venture. Part of the proceeds were used to acquire two omnichannel supermarkets with a combined acquisition cost of £38.4 million (including transaction costs), providing earnings growth in line with the Group's strategy.

Net debt decreased by £83.2 million over the six-months to 31 December 2023, to £546.8 million, and represents a loan to value of 33% (30 June 2023: 37%). The Group continues to maintain a conservative leverage policy, with a medium-term target LTV of 30-40%.

Financing

1.     Includes extension options at lenders' discretion

During the Period, the Group completed a comprehensive debt refinancing exercise, completing a new £67 million unsecured facility with Sumitomo Mitsui Banking Corporation, at the same time reducing its HSBC facility from £150 million to £50 million and cancelling its Barclays/RBC facility of £77.5 million. This refinancing has allowed the Group to increase its weighted average debt maturity to 4.1 years (30 June 2023: 3.7 years).

At 31 December 2023, the Group has gross borrowings of £588 million diversified across eight lenders, including £374 million of unsecured borrowings and £214 million of secured borrowings. In addition, the Group has available undrawn facilities of £177 million (which includes a £75 million credit approved accordion) and plenty of headroom under banking covenants, providing the capacity to execute opportunistic transactions as they arise.

The Group has £97 million of debt maturing in the next twelve months, all of which is covered by undrawn facilities. The Group maintains good long-term relationships with all lenders and is currently in discussions regarding the refinancing requirement and expects to conclude the transaction on or around the current financial year end.

The Group's interest rate risk is mitigated through a combination of fixed debt and derivative interest rate swaps and caps. During the Period, the Group utilised the value of its existing in-the-money interest rate hedges to extend the term of its hedging arrangements by 12 months at no additional cost to the Company. As a result of these transactions, 100% of the Group's drawn debt is now either fixed or hedged for 2.7 years at a weighted average cost of 3.1%.

The Group continues to monitor its banking covenants and maintains significant headroom on its LTV and ICR covenants. As at 31 December 2023, property values would need to fall by around 42% before breaching the gearing covenant. Similarly, net rental income would need to fall by 56% before breaching the interest cover covenant.

Fitch Ratings, as part of its annual review, reaffirmed the Group's BBB+ rating with a stable outlook.

Atrato Capital Limited

Investment Adviser

12 March 2024

RINCIPAL RISKS AND UNCERTAINTIES

The Audit and Risk Committee, which assists the Board with its responsibilities for managing risk, regularly considers changes to the principal risk and uncertainties for the Group. The risk management process including the identification, consideration and assessment of those emerging risks which may impact the Group, remain as described in the 2023 Annual Report.

In the Period, the probability of Property Risk, 'our ability to source assets may be affected by competition for investment properties in the supermarket sector', was increased from low to moderate and the Macroeconomic Risk, 'impact of the war in Ukraine' was expanded to include the impact of all geopolitical conflicts.  

The principal risks and uncertainties faced by the Company in the Period have otherwise not changed from what is detailed on pages 52 to 58 of the 2023 Annual Report and no further changes are expected in the remaining six-months of the financial year ending 30 June 2024. A summary of those principal risks and uncertainties is provided below:

Property risk

·    The lower-than-expected performance of the Portfolio could reduce property valuations and/or revenue, thereby affecting our ability to pay dividends or lead to a breach of our banking covenants

·      Our ability to source assets may be affected by competition for investment properties in the supermarket sector

·      The default of one or more of our lessees would reduce revenue and may affect our ability to pay dividends

·      The default of one of the supermarket operators would create an excess supply of supermarket real estate, thereby putting pressure on ERVs leading to a breach in our banking covenants

Financial risk

·   Our use of floating rate debt will expose the business to underlying interest rate movements as interest rates continue to rise

·     A lack of debt funding at appropriate rates may restrict our ability to grow

·     We must be able to operate within our banking covenants

Corporate risk

·      There can be no guarantee that we will achieve our investment objectives

·      We are reliant on the continuance of the Investment Adviser

Taxation risk

·   We operate as a UK REIT and have a tax-efficient corporate structure, with advantageous consequences for UK shareholders. Any changes to our tax status or in UK legislation could affect our ability to achieve our investment objectives and provide favourable returns to shareholders

Climate risk

·   The assets within the Group's portfolio that are less energy efficient may be exposed to downward pressure on valuation or increased pressure to invest in the improvement of individual assets

·     Changes in regulatory policy could lead to our assets becoming unlettable

·     Volatile changes in the weather systems may deem the Group's properties no longer viable to tenants

Cyber risks

·   The rise in attempted cyber crime and more recently cyber risks arising from recent geopolitical tensions has increased the risk for a listed company

Market price risk

·     Shareholders may not be able to realise their shares at a price above or the same as they paid for the shares or at all

Macroeconomic risks

·      Inflationary pressures on the valuation of the portfolio

·      Impact of geopolitical conflict

ALTERNATIVE INVESTMENT FUND MANAGER (the "AIFM")

The AIFM was appointed with effect from 15 June 2017 as the Company's alternative investment fund manager under the terms of a Management Agreement between the Company and the AIFM, in accordance with the Alternative Investment Fund Manager's Directive and the Alternative Investment Fund Managers Regulations 2013. The AIFM is licensed and regulated by the Guernsey Financial Services Commission.

The AIFM is responsible for the day-to-day management of the Company's investments, subject to the investment objective and investment policy and the overall supervision of the Directors. The AIFM is also required to comply with on-going capital, reporting and transparency obligations and a range of organisational requirements and conduct of business rules. The AIFM must also, as the AIFM for the Company, adopt a range of policies and procedures addressing areas such as risk management, liquidity management, conflicts of interest, valuations, compliance, internal audit and remuneration.

DIRECTORS' RESPONSIBILITY STATEMENT

The Directors confirm that, to the best of their knowledge, this condensed set of consolidated financial statements has been prepared in accordance with IAS 34 as adopted by the United Kingdom and that the operating and financial review included herein provides a fair review of the information required by DTR 4.2.7 and DTR 4.2.8 of the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority, namely:

·   an indication of important events that have occurred during the Period and their impact on the condensed financial statements and a description of the principal risks and uncertainties for the remaining months of the Group's financial year; and

·      disclosures of any material related party transactions in the Period. These are included in note 21. 

full list of Directors of the Company can be found at the end of this interim report. Shareholder information is as disclosed on the Supermarket Income REIT plc website.

For and on behalf of the Board

Nick Hewson

Chair

12 March 2024

INDEPENDENT REVIEW REPORT TO SUPERMARKET INCOME REIT PLC

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 31 December 2023 is not prepared, in all material respects, in accordance with UK adopted International Accounting Standard 34 and the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 31 December 2023 which comprises the Condensed Consolidated Statement of Comprehensive Income, the Condensed Consolidated Statement of Financial Position, the Condensed Consolidated Statement of Changes in Equity, the Condensed Consolidated Cash Flow Statement and the related notes.

Basis for conclusion

We conducted our review in accordance with International Standard on Review Engagements (UK) 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" ("ISRE (UK) 2410"). A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

As disclosed in note 1, the annual financial statements of the group are prepared in accordance with UK adopted international accounting standards. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with UK adopted International Accounting Standard 34, "Interim Financial Reporting.

Conclusions relating to going concern

Based on our review procedures, which are less extensive than those performed in an audit as described in the Basis for conclusion section of this report, nothing has come to our attention to suggest that the directors have inappropriately adopted the going concern basis of accounting or that the directors have identified material uncertainties relating to going concern that are not appropriately disclosed.

This conclusion is based on the review procedures performed in accordance with ISRE (UK) 2410, however future events or conditions may cause the group to cease to continue as a going concern.

Responsibilities of directors

The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

In preparing the half-yearly financial report, the directors are responsible for assessing the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so.

Auditor's responsibilities for the review of the financial information

In reviewing the half-yearly report, we are responsible for expressing to the Company a conclusion on the condensed set of financial statement in the half-yearly financial report. Our conclusion, including our Conclusions Relating to Going Concern, are based on procedures that are less extensive than audit procedures, as described in the Basis for Conclusion paragraph of this report.

Use of our report

Our report has been prepared in accordance with the terms of our engagement to assist the Company in meeting the requirements of the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority and for no other purpose.  No person is entitled to rely on this report unless such a person is a person entitled to rely upon this report by virtue of and for the purpose of our terms of engagement or has been expressly authorised to do so by our prior written consent.  Save as above, we do not accept responsibility for this report to any other person or for any other purpose and we hereby expressly disclaim any and all such liability.

BDO LLP

Chartered Accountants

London, UK

12 March 2024

BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127).

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the six month period ended 31 December 2023

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As at 31 December 2023

These unaudited condensed consolidated financial statements were approved and authorised for issue by the Board of Directors on 12 March 2024 and were signed on its behalf by: Nick Hewson, Chairman.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the six month period ended 31 December 2023 (unaudited)

For the year from 1 July 2022 to 30 June 2023 (audited)

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the six month period ended 31 December 2022 (unaudited)

CONDENSED CONSOLIDATED CASH FLOW STATEMENT

For the six month period ending 31 December 2023

1.    Basis of preparation

General information

Supermarket Income REIT plc is a company registered in England & Wales with its registered office at 1 King William Street, London, United Kingdom, EC4N 7AF. The principal activity of the Company and its subsidiaries (the "Group") is to provide its shareholders with an attractive level of income together with the potential for capital growth by investing in a diversified portfolio of supermarket real estate assets in the UK.

The financial information set out in this report covers the six months to 31 December 2023, with comparative numbers amounts shown for the year to 30 June 2023 and the six months to 31 December 2022. These condensed financial statements are unaudited and the financial information for the year ended 2022 contained herein does not constitute statutory accounts for as defined in section 434 of the Companies Act 2006. The statutory accounts for the year ended 30 June 2023 have been delivered to the Registrar of Companies. The independent auditors' report on those accounts was unqualified, did not draw attention to any matters by way of emphasis, and did not contain a statement under sections 498(2) or 498(3) of the Companies Act 2006.

At 31 December 2023 the Group comprised of the Company and its wholly-owned subsidiaries. All subsidiaries are incorporated in the England & Wales and Jersey.

The condensed consolidated financial statements have been prepared in accordance with IAS 34 'Interim Financial Reporting' as adopted by the United Kingdom. The accounting policies adopted in this report are consistent with those applied in the Group's audited financial statements for the year ended 30 June 2023. The accounting policies applied in the preparation of this financial information are expected to be consistently applied in the financial statements for the year to 30 June 2024.

Accounting convention and currency

The condensed consolidated financial statements ("the financial statements") have been prepared on a historical cost basis, except that investment properties, rental guarantees and interest rate derivatives are measured at fair value.

The financial statements are presented in Pounds Sterling and all values are rounded to the nearest thousand (£'000), except where otherwise indicated. Pounds Sterling is the functional currency of the Group and the presentation currency of the Group.

The Directors are of the opinion that the Group is currently engaged in a single segment business, being investment in United Kingdom in supermarket property assets.

Going concern

In light of the current macroeconomic backdrop, the Directors have placed a particular focus on the appropriateness of adopting the going concern basis in preparing the Group's interim results for the six months ended 31 December 2023. In assessing the going concern basis of accounting the Directors have had regard to the guidance issued by the Financial Reporting Council.

Liquidity

At 31 December 2023, the Group generated net cash flow from operating activities of £42.1 million and had cash and undrawn committed facilities totalling £138.8 million with no capital commitments or contingent liabilities.

The Directors are of the belief that the Group continues to be well funded during the going concern period with no concerns over its liquidity.

Refinancing events

At the date of signing the financial statements, the Deka facility (£96.6 million) falls due for repayment during the going concern period (August 2024). It is intended that the facility will be refinanced prior to maturity, or if required, it will be paid down in full utilising the Group's available undrawn committed facilities of over £100 million. All lenders have been supportive during the year and have expressed commitment to the long-term relationship they wish to build with the Company.

1.    Basis of preparation (continued)

Covenants

The Group's debt facilities include covenants in respect of LTV and interest cover, both projected and historic. All debt facilities, except for the unsecured facilities, are ring-fenced with each specific lender.

The Directors have evaluated a number of scenarios as part of the Group's going concern assessment and considered the impact of these scenarios on the Group's continued compliance with secured debt covenants. The key assumptions that have been sensitised within these scenarios are falls in rental income and increases in administrative cost inflation.

As at the date of issuance of this consolidated financial information 100% of contractual rent for the period has been collected. The Group benefits from a secure income stream from its property assets that are let to tenants with excellent covenant strength under long leases that are subject to upward only rent reviews.

The list of scenarios is below and are all on top of the base case model which includes prudent assumptions on valuations and cost inflation. No sensitivity for movements in interest rates have been modelled as the Group is fully hedged during the going concern assessment period.

The Group continues to maintain covenant compliance for its LTV and ICR thresholds throughout the going concern assessment period under each of the scenarios modelled. One of the secured facilities in the Group has a debt yield covenant, which is calculated as the passing rent divided by the loan balance for the properties secured against the lender. The debt yield covenant only would be breached for this facility if rental income is reduced by 11% during the going concern assessment period. The Board considers this scenario highly unlikely given the underlying covenant strength of the tenants. Furthermore, there are remedies available to the Group which include reducing a portion of the outstanding debt from available undrawn facilities or providing additional security over properties that are currently unencumbered.

The lowest amount of ICR headroom experienced in the worst-case stress scenarios was 38%. Based on the latest bank commissioned valuations, property values would have to fall by 21% before LTV covenants are breached, and 8% against the 31 December 2023 Group valuations. Similarly, the strictest interest cover covenant within each of the ring-fenced banking groups is 225%, where the portfolio as a whole is forecast to have an average interest cover ratio of 529% during the going concern period.

Having reviewed and considered three modelled scenarios, the Directors consider that the Group has adequate resources in place for at least 12 months from the date of these results and have therefore adopted the going concern basis of accounting in preparing the interim financial statements.

2.    Significant accounting judgements, estimates and assumptions

There have been no new or material revisions to the nature and amount of judgements and estimates reported in the Annual Report 2023, other than changes to certain assumptions applied in the valuation of properties. Details of the key assumptions applied at 31 December 2023 are set out in note 12.

3.    Summary of material accounting policies

The principal accounting policies adopted in this report are consistent with those applied in the Group's audited financial statements for the year ended 30 June 2023 and are expected to be consistently applied during the year ending 30 June 2024.

3.1.  New standards issued and effective

There were a number of new standards and amendments to existing standards which are required for the Group's accounting period beginning on 1 July 2023.

The following amendments are effective for the period beginning 1 July 2023:

-       IFRS 17 Insurance Contracts;

-       Disclosure of Accounting Policies (Amendments to IAS 1 Presentation of Financial Statements and IFRS Practice Statement 2);

-       Definition of Accounting Estimates (Amendments to IAS 8 Accounting policies, Changes in Accounting Estimates and Errors);

-       Deferred Tax related to Assets and Liabilities arising from a Single Transaction (Amendments to IAS 12 Income Taxes); and

-       International Tax Reform - Pillar Two Model Rules (Amendment to IAS 12 Income Taxes)

There was no material effect from the adoption of the above-mentioned amendments to IFRS effective in the period. They have no significant impact to the Group as they are either not relevant to the Group's activities or require accounting which is already consistent with the Group's current accounting policies.

3.2.  New standards issued but not yet effective

Amendments to IAS 1 on Classification of liabilities as Current or Non-Current are effective for the financial years commencing on or after 1 January 2024 and are to be applied retrospectively. It is not expected that the amendments will have an impact on the presentation and classification of liabilities in the Group Statement of Financial Position based on rights that are in existence at the end of the reporting period.

A number of new standards and amendments to standards and interpretations have been issued but are not yet effective for the current accounting period. None of these are expected to have a material impact on the consolidated financial statements of the Group.

4.    Gross rental income

Included within rental income is a £1,099,000 (six months to 31 December 2022: £1,256,000; year to 30 June 2023: £2,512,000) rent smoothing adjustment that arises as a result of IFRS 16 'Leases' requiring that rental income in respect of leases with rents increasing by a fixed percentage be accounted for on straight-line basis over the lease term. During the year this resulted in an increase in rental income and an offsetting entry being recognised in profit or loss as an adjustment to the investment property revaluation.

Also included in rental income is a £216,000 (six months to 31 December 2022: £205,000; year to 30 June 2023 £499,000) adjustment for lease incentives. Tenant lease incentives are recognised on a straight line basis over the lease term as an adjustment to rental income. During the year this resulted in an increase in rental income and an offsetting entry being recognised in profit or loss as an adjustment to the investment property revaluation.

On an annualised basis, rental income comprises £50,460,000 relating to the Group's largest tenant and £30,681,000 relating to the Group's second largest tenant. There were no further tenants representing more than 10% of annualised gross rental income during either year.

5.    Service charge expense

6.    Administrative and other expenses

7.    Directors' remuneration

The Group has no employees. The Directors, who are the key management personnel of the Group, are appointed under letters of appointment for services. Directors' remuneration, all of which represents fees for services provided, was as follows:

¹ Directors' individual fee levels are unchanged in the period. In March 2023 the Board increased from five to six non-executive Directors, with an associated increase in Total Directors' remuneration.  

8.    Finance Income and expense

Finance income

Finance expense

*This includes a non-recurring exceptional charge of £281,000 (six months to 31 December 2022: £1.52m, year to 30 June 2023: £1.52m), relating to the acceleration of unamortised arrangement fees in respect of the modification of loan facilities under IFRS 9.

The above finance expense includes the following in respect of liabilities not classified as fair value through profit or loss:

9.    Taxation

The Company and its subsidiaries operate as a UK Group REIT. Subject to continuing compliance with certain rules, the UK REIT rules exempt the profits of the Group's property rental business from UK corporation tax. To operate as a UK Group REIT a number of conditions had to be satisfied in respect of the Company, the Group's qualifying activity and the Group's balance of business. Since 21 December 2017 the Group has met all such applicable conditions.

The reconciliation of the profit before tax multiplied by the standard rate of corporation tax for the period of 25% (30 June 2023: 20.4% 31 December 2022: 19%) to the total tax (credited) is as follows:

10.  Earnings per share

Earnings per share ("EPS") amounts are calculated by dividing the profit or loss for the period attributable to ordinary equity holders of the Company by the weighted average number of ordinary shares in issue during the period. As there are no dilutive instruments outstanding, basic and diluted earnings per share are identical.

The European Public Real Estate Association ("EPRA") publishes guidelines for calculating adjusted earnings on a comparable basis. EPRA EPS is a measure of EPS designed by EPRA to enable entities to present underlying earnings from core operating activities, which excludes fair value movements on investment properties.

The Company has also included an additional earnings measure called "Adjusted Earnings" and "Adjusted EPS". Adjusted earnings is a performance measure used by the Board to assess the Group's financial performance and dividend payments. The metric adjusts EPRA earnings by deducting one-off items such as debt restructuring costs and adding back finance income on derivatives held at fair value through profit and loss. Adjusted Earnings is considered a better reflection of the measure over which the Board assesses the Group's trading performance and dividend cover.

Finance income received from derivatives held at fair value through profit and loss are added back to EPRA earnings as this reflects the cash received from the derivatives in the period and therefore gives a better reflection of the Group's net finance costs.

Debt restructuring costs relate to the acceleration of unamortised arrangement fees following the restructuring of the Group's debt facilities during the period.

The reconciliation of IFRS Earnings, EPRA Earnings and Adjusted Earnings is shown below:

¹ Based on the weighted average number of ordinary shares in issue

10.  Earnings per share (continued)

11.  Dividends

On 6 July 2023, the Board declared a fourth interim dividend for the year ending 30 June 2023 of 1.5 pence per share, which was paid on 4 August 2023 to shareholders on the register on 14 July 2023.

On 5 October 2023 the Board declared a first interim dividend for the year ending 30 June 2024 of 1.515 pence per share, which was paid on 16 November 2023 to shareholders on the register on 13 October 2023.  The withholding tax element of the dividend of £2.3 million was settled in January 2024.

On 4 January 2024, the Board declared a second interim dividend for the year ending 30 June 2024 of 1.515 pence per share, which was paid on 14 February 2024 to shareholders on the register on 12 January 2024. This has not been included as a liability as at 31 December 2023.

12.  Investment Properties

In accordance with IAS 40 'Investment Property', the Group's investment properties have been independently valued at fair value by Cushman & Wakefield, an accredited independent valuer with a recognised and relevant professional qualification and with recent experience in the locations and categories of the investment properties being valued. The valuations have been prepared in accordance with the RICS Valuation - Global Standards (the 'Red Book') and incorporate the recommendations of the International Valuation Standards Committee which are consistent with the principles set out in IFRS 13.

The independent valuer in forming its opinion on valuation makes a series of assumptions. All the valuations of the Group's investment property at 31 December 2023 are classified as 'level 3' in the fair value hierarchy defined in IFRS 13. The valuations are ultimately the responsibility of the Directors. Accordingly, the critical assumptions used in establishing the independent valuation are reviewed by the Board.

Of the seventeen properties held under long leaseholds, the years unexpired on the headleases are as follows: four properties with between 115 and 155 years, and thirteen properties with between 967 and 987 years. The Group has no material liabilities in respect of these headleases.

12.  Investment Properties (continued)

Included within the carrying values of investment properties at 31 December 2023 is £9,822,000 (six months to 31 December 2022: £7,468,000, year to 30 June 2023: £8,724,000) in respect of the smoothing of fixed contractual rent uplifts as described in note 4. The difference between rents on a straight-line basis and rents receivable is included within the carrying value of the investment properties but does not increase that carrying value over fair value.

Included within the carrying values of investment properties at 31 December 2023 is £816,000 (six months to 31 December 2022: £nil, year to 30 June 2023: £251,000) in respect of the lease incentives with tenants in the form of rent free debtors as described in note 4.

The effect of these adjustments on the revaluation movement for the period is as follows:

Valuation techniques and key unobservable inputs

Valuation techniques used to derive fair values

The valuations have been prepared on the basis of market value which is defined in the RICS Valuation Standards as 'the estimated amount for which an asset or liability should exchange on the date of the valuation between a willing buyer and a willing seller in an arm's length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion'. Market value as defined in the RICS Valuation Standards is the equivalent of fair value under IFRS.

Unobservable inputs

Significant unobservable inputs include: the estimated rental value ("ERV") based on market conditions prevailing at the valuation date and the equivalent yield (defined as the weighted average of the net initial yield and reversionary yield). Other unobservable inputs include but are not limited to the future rental growth - the estimated average increase in rent based on both market estimations and contractual situations and the physical condition of the individual properties determined by inspection.

A decrease in ERV would decrease fair value. A decrease in the equivalent yield would increase the fair value.

Sensitivity of measurement of significant unobservable inputs

The determination of the valuation of the Group's investment property portfolio is open to judgements and is inherently subjective by nature.

12.  Investment Properties (continued)

Sensitivity analysis - impact of changes in net initial yields and rental values

The table below analyses the sensitivity on the fair value of investment properties for changes in rental values and net initial yields: