NewRiver has a bold but risky turnaround plan

On a portfolio-wide basis, NewRiver Reit’s (NRR) results for the year to 31 March were disappointing. The company swung to a loss thanks to a valuation hit caused by higher interest rates, having already haemorrhaged well over half its share price value since 2020. Net rental income also dropped 2.3 per cent, indicating falling tenant demand for its assets. Its dividend has decreased and the net debt to net assets ratio remains elevated, which is more worrying now when debt is more expensive.

Chief executive Allan Lockhart sees things differently. The IFRS figures, he says, include assets it has already sold or is looking to sell. The numbers look more encouraging when focused purely on the assets it wants to keep. Its ‘core’ shopping centres and retail park assets both recorded an increase in rent per square foot, with the former recording a marginal uptick of 0.78 per cent and the latter recording a jump of 12.4 per cent. Both groups of properties also increased in value over the period.

The properties it wants to sell account for 34 per cent of its portfolio and are split into two groups: 'work out' assets and 'regeneration' assets. It will offload the former as they are and sell the latter once they achieve planning permission for residential redevelopment. Selling may not be easy or profitable in a market where values are down and debt is expensive. Nevertheless, Lockhart says he expects to have fully exited the 'work out' portfolio by this time next year and exited the regeneration portfolio in about two years’ time. 

Should that strategy play out the way NewRiver hopes, the company could return to growth. And, while investing in the strategy requires a lot of faith, there are some positive signs. NewRiver’s dividend yield remains higher than many of its Reit peers even with the payout reduction, and it is also covered 1.25 times by funds from operations. Consensus forecasts from FactSet predict that the dividend will grow further in 2024 and 2025. 

Regarding its balance sheet, debt is fixed at 3.5 per cent until 2028. Some of this is secured against assets it intends to sell, but that should generate cash with which it will be able to pay down borrowings. Based on the dividend yield and current discount to net asset value, we still rate this company as worthy of investment, despite the risks. Buy.

Last IC view: Buy, 90p, 9 Mar 2023