Investors are “licking their lips” at the prospect of “distressed” Morrisons selling off its store estate, according to a property industry source.
However, such a move would be “disastrous” for Morrisons in the long-term thanks to depressed foodstore values.
Morrisons has been under pressure since its £7.1bn debt-fuelled takeover by Clayton Dubilier & Rice in 2021. New accounts filed this week by a Morrisons parent company created by CD&R posted a £1.5bn loss before tax in the 65 weeks to 30 October 2022, including £593m in finance costs.
Credit ratings agency Moody’s last month changed the outlook for Morrisons’ ability to repay its debt pile from ‘stable’ to ‘negative’ – and downgraded its existing ‘junk’ rating from B1 to B2 – pointing to like for like sales falling 4.2% in 2022.
It has led to “a lot of market talk about Morrisons and its need to release some of the property portfolio”, according to the property source.
Meanwhile, foodstore values are falling, with listed supermarket property investor Supermarket Income REIT recently reporting a 13.3% drop in the valuation of its direct portfolio on a like for like basis in the six months to 31 December 2022.
As a result, “a whole tranche of people are licking their lips and thinking there are rich pickings to be had” by snapping up swathes of Morrisons stores and leasing them back to the supermarket, according to the property source.
“A lot of it is coming from the US, a lot of it is private equity. People are basically smelling distress.
“But it would be damaging to Morrisons as a business in the longer-term if they break up the store portfolio and sell large swathes of it.
“A few strategic sale & leasebacks is part and parcel of being a grocery retailer but a wholesale sale & leaseback would be disastrous.”
The source pointed to the £495m sale & leaseback of Debenham’s department stores by its private equity owner in 2005 – tying the retailer into expensive property deals ahead of its ultimate collapse in 2020 – as a prime example of how it can go wrong.
“Would that business still be with us if it owned its portfolio? Yes, it would. The damage was done in the massive sale & leaseback. It doesn’t kill a business overnight, but it comes home to roost.”
Morrisons has been suffering at the hands of the discounters in the cost of living crisis, with Aldi taking its former place as the UK’s fourth biggest supermarket in Kantar market share data last September. Morrisons’ market share has fallen from 9.8% to 9% in the past year, while Aldi’s has climbed from 8% to 9.4% [Kantar 12 w/e 19 February 2023].
Alternative market share data this week put Aldi and Lidl both ahead, on 11.4% and 9.2% respectively, compared with Morrisons’ 8.2% [Nielsen IQ 12 w/e 25 February].
In December, Morrisons completed a £220m sale & leaseback of seven warehouses across the UK, agreeing to lease the properties for up to 25 years.
Stephen Springham, head of retail research at Knight Frank, a real estate agent which acts for Morrisons, said: “The change in ownership at Morrisons has changed dynamics and may bring it more exposure to financial markets, and there are interested parties.”
Knight Frank data suggests investor interest in foodstores cooled in 2022, with transactions totalling £700m compared with £1.95bn in 2021. The real estate agent has estimated capital values of supermarkets fell about 20% in 2022. It forecasts they will fall another 5.6% in 2023 before returning to growth in 2024.
Springham said the market volatility was reflected by LXi REIT abandoning a £500m sale & leaseback deal for 18 Sainsbury’s stores in September.
However, he said it was not a reflection of investor sentiment toward foodstores specifically – which were still seen as “pretty safe” – but instead of the wider investment market, amid high interest rates and a potential looming recession.
“I think investment markets generally have changed pretty dramatically in the last few months. No sector is immune and foodstores are probably one of the better ones.
“Pricing across every real estate asset class moved out pretty quickly.
“For grocers looking to do a sale & leaseback at the moment, investor appetite is still there, but they’ll have to accept less than they might have hoped for.”
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