Supermarket Income REIT(LSE: SUPR) is a company that caught my eye when it was floated in July, raising £100m at 100p a share. With an experienced board of directors and an investment management team that has previously executed £3.5bn of supermarket sale and leaseback transactions, this new real estate investment trust offers an attractive proposition for dividend-focused investors.
The company is building a portfolio of properties let to UK supermarket operators, aiming to derive at least 60% of its rental income from the biggest four, namely, Tesco, Sainsbury's, Asda and Morrisons. It's targetting principally freehold and long leasehold properties with index-linked or fixed rental uplifts and with typically more than 15 years to first break. The objective is to provide shareholders with a progressive dividend offering considerable inflation protection.
The company also has an eye on long-term capital growth, including by targetting assets in areas with good potential for alternative use over the longer term, such as residential housing. I also like the fact that the board will be taking a prudent approach to gearing, by maintaining conservative level borrowings.
Set for wider attention
The company has already invested over £150m on three acquisitions and secured a £100m revolving credit facility on attractive terms from HSBC. It announced a first interim dividend of 1.375p a share last week (the ex-dividend date is tomorrow). And in a maiden trading update today, it reaffirmed it's on track to deliver an annualised 5.5p dividend for the full year to 30 June 2018.
As the shares are currently little changed from the 100p IPO price, there's a nice yield on offer. And with management targetting a total return of 7% to 10% a year over the medium-term, this is an under-the-radar dividend stock that could soon be attracting wider attention.
Investors in Supermarket Income REIT would be delighted if the stock were to follow in the footsteps of Watkin Jones(LSE: WJG), which floated at 100p a share in March last year. This well-established specialist in the development, construction and management of student accommodation also came to market with an attractive dividend in prospect.
It didn't remain entirely under the radar for long. Within six months, its shares began to rise and the price has reached 220p today. Shrewd investors appreciated the company's forward-sale business model and end-to-end service, which reduce risk and provide good cash flow visibility. Management has also increasingly demonstrated its capabilities and its good execution on its strategy.
Due to the more-than-doubling of the share price since flotation, the dividend yield has compressed to 3%. I like the company but it looks fully valued to me now. As such, Supermarket Income REIT appears a potentially better-value opportunity at this stage, although I wouldn't expect it to repeat the magnitude of Watkin Jones's share price rise over a similarly short period.
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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.