Property group NewRiver Retail (NRR) has spent the past few years growing into its generous dividend and 2015 marked the point at which the group's payout finally became covered by so-called EPRA earnings (earnings excluding property revaluations and gains or losses on disposals) and cover is expected to rise from here (see bar chart below). We think that this, along with investors' increased interest in the type of secondary property New River owns, the company's shrewd approach to purchases and development, and a planned move from Aim to the main list in July, means NewRiver has a lot to offer as an income play in 2016 and the shares should be attracting more investor attention as the year rolls on.
- Very attractive dividend
- Modest loan-to-value ratio
- Shrewd property acquisition and development strategy
- Planned move from Aim to main market
- Big exposure to the retail sector
- Dilutive effect of share placings
When buying shares for income, especially shares in a fast-expanding property company, cover is a key consideration, and that is something that NewRiver now delivers on. It has grown income to underpin the dividend by investing in high-yield retail assets bursting with development opportunities. And, importantly, as the rent roll continues to grow, management is committed to pursuing a progressive dividend policy. And the prospective 5.5 per cent yield is made all the more attractive by the fact dividends are paid quarterly.
The company has had little trouble finding attractive investment opportunities over the past year. Indeed, any dilution effect of two £150m placings last year - one in June and one in December - have been kept to a minimum by the very rapid reinvestment of the proceeds, predominately in warehouses and pubs. But management only buys when properties match strict criteria.
A key part of what NewRiver looks for is the ability to work in close collusion with existing and aspiring tenants to extract further value from the asset. This helps reduce the conventional risks associated with development by focusing efforts within the existing income-generating portfolio.
That's a long way from building an asset and then hoping to find a tenant. Risk-controlled development activities include a planning application for a £65m town centre redevelopment in Burgess Hill, West Sussex, and there are plans for a £64m redevelopment of Templars Square in Cowley.
In total, the development pipeline equates to more than 1m sq ft. Demand for quality retail space means that new lettings, of which there were 109 in the first half, were secured at nearly 8 per cent above estimated rental value, and in the second quarter alone the total rent roll grew by nearly a fifth to an annualised £85.3m.
| NEWRIVER RETAIL (NRR) | ||||
|---|---|---|---|---|
| ORD PRICE: | 344p | MARKET VALUE: | £643m | |
| TOUCH: | 342.5-346p | 12M HIGH: | 362p | LOW: 283p |
| FORWARD DIVIDEND YIELD: | 5.5% | TRADING PROPERTIES: | nil | |
| PREMIUM TO FORWARD NAV: | 10% | NET DEBT: | 55% | |
| INVESTMENT PROPERTIES: | £820m | |||
| Year to 31 Mar | Net asset value (p) | Recurring profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2013 | 240 | 10.5 | 13.6 | 16 |
| 2014 | 240 | 7.3 | 12.0 | 16 |
| 2015 | 265 | 18.5 | 17.6 | 17 |
| 2016* | 300 | 35.2 | 21.0 | 18.5 |
| 2017* | 314 | 40.9 | 21.9 | 19 |
| % change | +5 | +16 | +4 | +3 |
Normal market size: 3,000 Matched bargain trading Beta: 0.2 *Liberum forecasts, EPRA NAV, PTP and EPS | ||||
NewRiver's innovative approach is well demonstrated by the chain of pubs that it has acquired, which accounts for almost 15 per cent of the portfolio. Mindful of the challenges facing pubs due to the smoking ban, drink/drive rules and cheap supermarket alcohol, as well as a trend towards more convenience shopping, NewRiver bought 202 pubs from Marston's on a sale-and-leaseback agreement.
Marston's pays rent on the pubs that it continues to trade in while excess land, such as redundant car parks, is being used to develop a string of convenience stores in a deal with the Co-operative Group. Of 50 planning applications submitted, 22 planning consents have already been secured. Its pub portfolio was expanded further in September with the purchase of 158 pubs from Punch Taverns for £53.5m. The purchase price translates into an attractive net initial yield of 13.5 per cent, and NewRiver reckons that this will generate a cash on cash equity return (that's annual pre-tax cash flow divided by total cash invested) of more than 20 per cent.
Finances are in pretty good shape, too. Net debt stood at 55 per cent of net assets at the September half-year end, and, boosted by a £22.9m valuation uplift on the property portfolio, the loan-to-value ratio fell from 39 per cent in March to 37 per cent. NewRiver has also had little trouble in raising new finance.
