In theory, knowing when to buy a real estate investment trust (Reit) should be simple. “The best indicator of whether it’s worth investing is a discount to net asset value (NAV),” says one property industry veteran who buys and sell shares in Reits on behalf of a prominent UK billionaire’s family trust. “Normally when it is trading at a premium you risk paying the wrong price.”
- Balance sheet has been repaired
- Slowing valuation declines
- High occupancy, better collections
- Shares at a big discount to NAV
- Weak market sentiment
- Latest virus news
But in recent years, shareholders have been rewarded for continually backing premium-rated landlords focused on logistics, GP surgeries and self-storage. Bets on a value-led bounce in the owners of retail parks and shopping centres have largely proved fruitless: share price declines have usually been followed by valuation falls, pushing up company indebtedness just as assets become harder to sell.
NewRiver Reit (NRR) is an example of the latter trend. The group, which operates 30 shopping centres and 18 retail parks across the country, aims to “own and manage the most resilient retail portfolio in the UK”. For the past few years, the portfolio has proved anything but resilient. Since March 2018, book value has more than halved from 292p a share as weak tenant trading and the pandemic clobbered investment values, further stretching an overextended balance sheet.
Currently, investors see little let-up in that trajectory. In November, the group reported net asset value (NAV) of 131p a share, down 13 per cent. The shares' steep discount to NAV suggests the market sees fair value a third lower still. This is perfectly understandable: calling the bottom in retail has been done many times, and with little success. Investors should always look to avoid catching falling knives.
That said, NewRiver no longer resembles the falling knife it did even six months ago. Although shareholder equity shrank in the half-year to September, most signs now point to repair.
For a start, the balance sheet looks far healthier. The first six months of the year included £236m of disposals, dominated by August’s sale of pub chain Hawthorn for £224m. Management described the valuation – 11.5 times pro-forma cash profits for the year to March 2020 – as at the “upper-end” of expectations. Even if the sale resulted in an 11p hit to NAV, recent deals in the sector and the subsequent fall-off in pub trade since the summer vindicate both price and decision.
This freed up cash to pay down a £170m revolving credit facility, cancel a £165m term loan and reduce the loan-to-value ratio to 39.4 per cent, from 50.6 per cent last March. Reassuringly, the only outstanding debt on NewRiver’s balance sheet is now a £300m bond maturing in 2028, and which was reaffirmed as investment-grade by Fitch three weeks ago.
However, selling assets to de-leverage only changes so much. A far more important question for any investor in the retail economy to ask is how much more harm can come from ecommerce.
Unsurprisingly, NewRiver has thought about this a lot. At a capital markets event in September, the Reit outlined a new framework to help categorise any UK retail asset and deploy capital accordingly. At present, 70 per cent of its assets are classed as either resilient or stable, meaning they are affordable retail sites backed by good fundamentals, but might require long-term intervention. Over time, NewRiver wants to increase this ratio to more than 90 per cent, with the remainder comprising assets whose values can grow via intervention or alternative use.
‘At risk’ assets – specifically underperforming shopping centres facing oversupply, and with limited alternative use and turnaround prospects – are to be sold off by March 2023. These so-called ‘work out’ sites are now worth £104m, following a 19 per cent downward revaluation in the first half of this year. Seven are on the block for sale in the coming months, with another four being repositioned for the ‘core’ shopping centre portfolio.
Why might a landlord still believe in regional shopping centres and retail parks? For one, a more liquid investment market for the kind of sub-£20m asset NewRiver specialises in has helped to stabilise estimated rental values.
Let's get physical
More importantly, consumers haven’t entirely disappeared onto the internet. Indeed, for many store types, physical retail is either the dominant sales channel or indispensable in the supply chain that supports online offerings. The rise of fulfilment centres and online returns will continue to drive footfall to shopping clusters. And if city centres are likely to be hit by a permanent shift to hybrid office working, the residential areas where NewRiver's sites are normally based should benefit.
A version of this thesis underpins premium ratings for some retail landlords, Supermarket Reit (SUPR) and LXI Reit (LXI) among them. NewRiver’s tenant base also stands out for its diversification (see table) and stability. At a group-wide average of £11.51 per square foot, rents are affordable and that explains why rent collections came to 90 per cent in the first half. A 96 per cent occupancy rate is also encouraging, as are recent demand trends: so far this year, long-term lease deals have been struck at a double-digit premium to estimated values.
|Tenant||NewRiver total rental income (%)|
|11-25 (including Next)||16.1%|
|26-100 (including Costa, Tesco, Greggs)||27.4%|
|Key categories outside the top 100|
|Home & furniture||1.5%|
|Pharmacists, opticians & beauty||1.5%|
|Source: company, accurate as of 30 Sep 2021|
Sadly, this doesn’t mean valuations won’t dip further by March. The Omicron variant is an unwelcome development for the entire UK economy, regardless of the relative resilience of certain retail sub-sectors. But chief executive Allan Lockhart is confident that he will be talking about portfolio growth by this time next year, a view that helps explain why broker Liberum thinks the shares should trade in line with NAV.
Until then, and following the reintroduction of dividends, investors will have to make do with a yield above 8 per cent. Sentiment looks behind the improving curve.
Last IC View: Hold, 84p, 26 Nov 2021
|Company Details||Name||Mkt Cap||Price||52-Wk Hi/Lo|
|NewRiver REIT (NRR)||£265m||86p||109p / 70.0p|
|NAV/Debt||NAV per share||Net Cash / Debt(-)||Gearing||5yr NAVps CAGR|
|Valuation||Disc Fwd NAV (+12mths)||Fwd PE (+12mths)||Fwd DY (+12mths)||FCF yld (+12mths)|
|Forecasts/ Momentum||Fwd NAV grth NTM||Fwd NAV grth STM||3-mth Mom||3-mth Fwd NAV change%|
|Year End 31 Mar||NAV per share* (p)||Profit before tax (£m)||EPS (p)||DPS (p)|
|source: FactSet, adjusted PTP and EPS figures|
|NTM = Next Twelve Months|
|STM = Second Twelve Months (i.e. one year from now)|
|*EPRA NAV per share|