This trust owns ‘the right su­per­mar­kets in the right places’ – and it yields 5.3pc

Su­per­mar­ket In­come Reit wants only those stores that are equally equipped to cater to shop­pers who visit in per­son and those who or­der on­line

The Daily Telegraph - Business - - Business - RICHARD EVANS

PUBS and restau­rants, sadly, will bear the brunt of the Prime Min­is­ter’s lat­est tight­en­ing of coro­n­avirus re­stric­tions, which he an­nounced on Tues­day. Where will the money that we would have spent in bars and bistros go? To the su­per­mar­kets.

They filled the gap when eat­ing out was banned en­tirely in the ini­tial lock­down and will doubt­less do the same now that pubs and restau­rants have to close at 10pm.

“This year’s un­prece­dented growth in gro­cery de­mand was in a large part trig­gered by the shift in con­sump­tion from eat­ing out­side the home in restau­rants to eat­ing in the home,” ac­cord­ing to Justin King, who led Sains­bury’s for more than a decade. Writ­ing be­fore the lat­est mea­sures were an­nounced, he added: “I do not

be­lieve we will re­turn to the pre-Covid lev­els of din­ing out any time soon and there­fore I ex­pect to see strong gro­cery de­mand con­tin­u­ing in the fore­see­able fu­ture.”

A par­tic­u­lar type of su­per­mar­ket is es­pe­cially suited to thrive in this new world, Mr King said. This type is the store that can cater both to shop­pers who ac­tu­ally visit it and to those who or­der on­line and have their goods sent to them from that store, rather than from a cen­tralised ware­house ded­i­cated solely to on­line or­ders.

Mr King said: “This strict dis­tinc­tion be­tween ‘bricks and mor­tar’ and on­line is a false one. The fu­ture model of gro­cery ne­ces­si­tates seam­less cus­tomer ser­vice across all chan­nels in which the cus­tomer chooses to shop. The vast ma­jor­ity of ca­pac­ity growth [in on­line shop­ping] dur­ing the pan­demic has come from Sains­bury’s, Tesco and Asda, which op­er­ate a largely ‘in-store pick’ model. Hence nearly all of that growth has come from ‘om­nichan­nel’ su­per­mar­kets rather than cen­tralised au­to­mated hubs.”

He said more than 80pc of on­line gro­cery or­ders were ful­filled from om­nichan­nel su­per­mar­kets op­er­at­ing as a “last-mile hub for both on­line and of­fline sales”.

Mr King said the use of gi­ant cen­tralised ware­houses might be eco­nomic when they were close to large cities such as Lon­don, but in other cases the ex­tra cost of de­liv­ery from re­mote hubs would out­weigh the ef­fi­ciency gains of au­toma­tion in the pick­ing process. As a re­sult, pick­ing on­line cus­tomers’ or­ders in stores close to where those cus­tomers lived would in most cases be bet­ter.

“It’s clear the larger su­per­mar­kets op­er­at­ing a truly om­nichan­nel op­er­a­tion with in-store pick ca­pac­ity were best po­si­tioned to re­spond quickly to the pan­demic,” Mr King said. “This fur­ther un­der­pins the im­por­tance of hav­ing the right stores in the right lo­ca­tions to be suc­cess­ful in the gro­cery in­dus­try.”

We have quoted Mr King at such length be­cause it is that idea of “hav­ing the right stores in the right lo­ca­tions” that lies at the heart of the strat­egy of an in­vest­ment trust we tipped in the early stages of the pan­demic,

Su­per­mar­ket In­come Reit. Mr King’s quotes ap­peared in the trust’s an­nual re­port – he is a se­nior ad­viser to its man­age­ment com­pany, Atrato Cap­i­tal.

The trust has re­cently added Waitrose to its orig­i­nal ten­ant roster of Tesco, Sains­bury’s and Mor­risons, and con­tin­ues to fo­cus on stores that are able to meet both on­line and in­per­son de­mand. The fund has grown quickly in the past year: the value of its port­fo­lio was £477m at its year end in June, com­pared with £231m a year pre­vi­ously, and since then it has an­nounced plans to raise more money from share­hold­ers to buy more as­sets.

Not only are its ten­ants fi­nan­cially solid but they are tied into long-term leases that in­volve “up­ward-only” in­fla­tion-linked rent in­creases. As a re­sult of this, and of the trust’s 100pc record of rent col­lec­tion dur­ing the pan­demic, it in­tends to in­crease this year’s div­i­dend in line with in­fla­tion (on the RPI mea­sure, nor­mally more gen­er­ous than the CPI) to 5.86p from 5.8p in the year to June.

At last night’s share price of 109p the new divi would give a yield of 5.3pc while the premium to net as­set value is 7.9pc. Such a high yield, based on a se­cure and ris­ing in­come stream, ap­pears strik­ingly at­trac­tive to Questor when Bank Rate is 0.1pc. A strong hold.

Up­date: Tem­ple Bar

This trust has an­nounced its new man­ager. We will re­port in more de­tail next week.

Read Questor’s rules of in­vest­ment be­fore you fol­low our tips: tele­graph.co.uk/go/ questor­rules; twit­ter.com/DTquestor

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