The FTSE250has been on a roll lately. Since October 2023, the mid-cap index has risen more than 30% as inflation eases. However, not all of its constituents have been so lucky. And many are still struggling to recover. But has this lack of investor attention actually created great buying opportunities?
A new bargain?
Among the stocks trading at a discount today, Supermarket Income REIT (LSE:SUPR) is currently standing out. The stock has fallen more than 40% over the past two years and is currently trading 16% below its net asset value. As a result, the dividend yield has skyrocketed and now stands at 8.2%.
High yields can often be a warning to stay away. Yet despite all this, management continues to reward shareholders for their loyalty. In fact, it just increased dividends for the sixth year in a row. So what’s going on?
For many companies in the real estate sector, higher interest rates are a major problem. Since purchasing real estate is expensive, these companies are notoriously dependent on loans to finance their expansion.
This is especially true for Supermarket Income because, as the name suggests, the company operates a portfolio of properties leased to supermarkets. And these assets are far more expensive compared to residential properties.
Although this company is not a household name, it is the landlord of many companies that are. Aldi, Asda, Marks & SpencerMorrisons, Sainsbury’s, Tescoand Waitrose are all long-term tenants. And following a recent acquisition in France, Carrefour, one of the world’s largest retailers, has just joined the ranks.
As a result, the average lease term is currently 13 years, which means recurring and reliable cash flows. And with that comes ever higher dividends.
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What’s the catch?
According to the latest interim results, rental income continues to grow at a double-digit rate and operating profit is increasing even faster.
As of December 2023, the Group has £584 million of outstanding debt on its balance sheet, which increased following the drawdown of a revolving credit facility to finance the aforementioned acquisition in France. However, following a £170 million refinancing plan, the Group’s loan-to-value ratio remains below management’s 40 percent cap at 37 percent.
While that’s still pretty close, cash flows seem more than sufficient to cover subsequent interest expenses. And with the average loan term at four years, Supermarket Income has plenty of room to pay down debt.
But while the balance sheet and profits appear robust, there are legitimate concerns about future growth. UK supermarkets are seeing a growing trend of retailers buying back their own stores rather than leasing them. As a result, the large retail rental market is actually shrinking.
Time to buy?
Management’s decision to expand into Europe makes a lot of sense in my opinion. The company already controls a large part of the UK market. And if current trends continue, the opportunities for portfolio expansion domestically will not be as great as they once were.
Prudent leadership is always a welcome sight. And combined with strong cash generation and a cheap valuation, I can’t help but view Supermarket Income REIT as a potential buying opportunity for my portfolio when I have more capital available.
The post A Ridiculously Cheap FTSE 250 Share to Buy Now? appeared first on The Motley Fool UK.
Further reading
Zaven Boyrazian does not own any of the stocks mentioned. The Motley Fool UK has recommended J Sainsbury Plc and Tesco Plc. The views expressed on companies mentioned in this article are those of the author and may therefore 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.
Motley Fool UK 2024
