Supermarket rents go just one way – up
Everyone has to eat, and that’s why owning a supermarket makes good financial sense – especially when the rent can only go up.
Investore Property, which is listed on the New Zealand stock exchange, specialises in investing in retail properties and now has a portfolio worth about $738 million.
Countdown supermarkets owned by Investore have leases where the rent can only go up and never decrease, even if there was the unlikely prospect of a general decline in the wider commercial market.
Investore has lease agreements with 33 of the 177 Countdown stores in New Zealand, chairman Mike Allen said.
In 2016 Investore took over retail properties owned by another NZX-listed company, Stride Management, which continues to manage them for a fee.
Of the 33 lease agreements Investore has with Countdown, 31 of them have ‘‘hard ratchet clauses’’, which means that at each rent review the base rents cannot fall below the preceding rent.
Rent reviews are carried out every five years and the new agreements are calculated from the previous base rent, plus a component of the average sales turnover of the previous three years.
And most of the leases have a clause increasing the rent 5 per cent at the first rent review.
Two Countdown properties, in Hamilton and Rotorua, are based on general market rent reviews where the rent rise at the review time may be lower than others in the group, but rents still cannot fall below the level applying at the start of the lease.
During the past year Investore took over three more Bunnings stores from Stride for $78m.
Last year Investore also bought two properties in Timaru next to its existing Countdown store for future expansion.
Investore also sold a Countdown at Hornby, Christchurch, and a FreshChoice in Queenstown for $32m because they were forecast to provide lower growth than other properties.
On the development side, Investore expanded the Mitre 10 Mega at Botany, Auckland.
Investore has 40 properties in total, with the majority in the North Island. The Countdown stores provided 73 per cent of its rental income, with the balance made up of Bunnings, Mitre 10, Foodstuffs, The Warehouse, and specialty stores.
Many of the properties have potential for development. The portfolio amounts to
48 hectares of land, and the buildings cover about 43 per cent of sites.
In the year ended in March the company’s retail tenants returned rent of
$47.2m. After management expenses of
$4m to Stride, Investore achieved an aftertax profit of $44m.
However, the share price at $1.50 a share has yet to recover to the $1.60 value at the time of its 2016 listing.
In March, Investore raised $100m in a bond issue paying 4.4 per cent a year, maturing in 2024 to repay bank debt.
Allen reiterated Investore’s game plan: long-term leases with an average weighted lease term for the portfolio of 13.1 years;
81 per cent of rentals not expiring until
2029 or later; a high occupancy rate of
99.9 per cent; and nationally recognised retailers with significant and longestablished businesses.