Sainsbury’s to acquire Supermarket Income REIT’s c.51% interest in Highbury and Dragon

J Sainsburys plc

On 21 September 2022, J Sainsbury plc (LON:SBRY) has announced that it had reached agreement on an acquisition price for stores held in the Highbury and Dragon investment vehicles. Sainsbury’s has held a c.49% interest in Highbury and Dragon since it was created in 2000. The vehicles comprise the freeholds of 26 Sainsbury’s supermarkets which are leased to Sainsbury’s. The remaining c.51% is owned by Supermarket Income REIT.

Today, Sainsbury’s announces the exchange of contracts for the purchase of Supermarket Income REIT’s c.51% interest in the Highbury and Dragon investment vehicles. The purchase will be implemented through an acquisition of Cornerford Limited, Horndrift Limited, Avenell Property PLC and Hobart Property PLC.

The Transaction will result in Sainsbury’s acquiring the freehold of 21 stores in the Highbury and Dragon investment vehicles which will continue to be operated as Sainsbury’s supermarkets. The remaining five stores will be sold by Sainsbury’s. Sainsbury’s has entered into new 15-year leases on four of these stores with five yearly open market rent reviews and a tenant break option at year ten. Following completion of the transaction, Supermarket Income REIT has the benefit of an option to acquire the four stores which are subject to the new Sainsbury’s leases for a net consideration of £33.2 million (net of SUPR’s existing interest and excluding acquisition costs). It is expected that the one remaining store will be sold at vacant possession value.

The Transaction is expected to complete on 17 March 2023 for a total consideration of £430.9 million (excluding costs) which will be paid in three tranches. £279.3 million will be paid on 17 March 2023 and £116.9 million will be paid on 10 July 2023. The third tranche of £34.7 million is conditional on the sale of the remaining five stores by Sainsbury’s. Additionally, Sainsbury’s will fully fund the Highbury and Dragon bond redemptions of £170.5 million on 20 March 2023 and £130.4 million on 13 July 2023 respectively. The total consideration and Highbury and Dragon bond redemptions will be funded by utilising the Group’s cash resources and also by drawing under a committed unsecured term facility.

The gross assets acquired as part of the Transaction total £431.5 million. The entities acquired in the Transaction generated aggregate profits before tax of £110.4 million in their most recent respective financial years. These profits, in part, reflected revaluation gains recognised on the investment properties held in the Highbury and Dragon investment vehicles. Going forward, Sainsbury’s will not recognise revaluation gains and losses on these assets as they will be held as owner operated freehold stores, instead seeing a reduction in depreciation and interest expenses, alongside a reduced cash outflow on rent.

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