There’s probably nothing of importance that veteran chief executive David Lockhart doesn’t know about the property market, which is one of the reasons that NewRiver Reit (NRR – formerly NewRiver Retail) is performing so well as the UK’s third-largest shopping centre owner. The company specialises in buying unloved assets that offer high rental yields before sprucing them up in order to raise rents and values.
Attractive dividend
Focus on the convenience store sector
Low development arm risk
JV acquisition to be earnings enhancing
Dependent on retail
Short-term impact of acquisition costs
The retail sector makes some investors nervous, and with good reason given changing consumer trends. Fortunately, NewRiver is well up with events, concentrating on the convenience store end of the sector, which is becoming increasingly popular as shoppers eschew the big hypermarkets. This is reflected in the 0.5 per cent rise in like-for-like footfall recorded at NewRiver's shopping centres in the year to the end of March 2017 compared with a 1.6 per cent drop in the UK benchmark.
NewRiver also seeks to limit risks associated with its development activity by investing in assets that it already owns. A typical example is the Templars Square shopping centre in Oxford bought in December 2012. The City Council has now approved its plans to regenerate this into a major mixed-use development costing £56m and covering 236,000 sq ft. This will include 226 new residential apartments, a hotel, two restaurants and modernised car parks. Crucially, the hotel and leisure element of the scheme is already 82 per cent let.
NewRiver is also buying out its partner in the Bravo 50:50 joint venture for £59.4m. Total joint venture net assets are worth £120.8m, valued at a net initial yield of 7.3 per cent. In all, the Bravo properties produce £16.5m in net rental income, so full control should secure NewRiver additional rental income of £8.3m a year. The £120m of net debt on the joint venture's balance sheet will transfer to NewRiver, but the enlarged portfolio's loan-to-value ratio is expected to remain around 37 per cent. The deal was funded through a £225m placing – £25m more than originally intended due to high demand. And with the equity raised at 335p, a 15 per cent premium to the last reported net asset value (NAV), the deal increased NAV by about 3 per cent.
| NEWRIVER REIT (NRR) | ||||
| ORD PRICE: | 349p | MARKET VALUE: | £817m* | |
| TOUCH: | 349-349.5p | 12-MONTH HIGH: | 369p | LOW: 265p |
| FORWARD DIVIDEND YIELD: | 6.3% | TRADING STOCK: | nil | |
| PREMIUM TO FWD NAV: | 14% | NET DEBT: | 61% | |
| INVEST PROPERTIES: | £1intended | |||
| Year to 31 Mar | Net asset value (p) | Net operating income (£m)** | Earnings per share (p)** | Dividend per share (p)** |
| 2015 | 265 | 36.2 | 15 | 17.0 |
| 2016 | 295 | 62.8 | 19.3 | 18.5 |
| 2017 | 292 | 89.7 | 19.9 | 20.0 |
| 2018** | 299 | 90.0 | 20.3 | 21.0 |
| 2019** | 305 | 102.7 | 22.4 | 22.0 |
| % change | +2 | +14 | +10 | +5 |
| Normal market size: | 1,500 | |||
| Matched bargain trading | ||||
| Beta: | 0.20 | |||
*Does not reflect impact of recent share placing **Peel Hunt forecasts, adjusted EPS and NAV figures, excludes 3p special dividend in 2017 | ||||
The development pipeline totals 1.9m sq ft and includes a 465,000 sq ft regeneration project at Burgess Hill. Half the retail and leisure elements here are already pre-let, while on the residential side a significant pre-sale agreement has been secured with a residential investment company. And at Canvey Island, planning consent was granted late in 2016 for a 62,000 sq ft retail park, over half of which is already pre-let.
Within NewRiver's pub portfolio, underused space, such as car parks, has been used to build a string of convenience stores for the Co-operative. One of these, let to the Co-op on a 15-year lease, has been sold at auction for £970,000, representing an initial yield of 4.85 per cent, which was 11 per cent ahead of the last valuation.
In April 2016 NewRiver completed its largest acquisition, paying £120m for the Broadway shopping centre and retail park in Bexleyheath at an equivalent yield of 7 per cent. In the first year rental income has risen and a master plan is being designed in conjunction with the local council.
NewRiver's generous dividend is supported by rising after-tax earnings and is paid out on a quarterly basis. And, given that funds from operations in the year to march 2017 grew by 24 per cent to £58.2m, NewRiver is increasing the quarterly payout to 5.25p a share, which equates to a yield of over 6 per cent.
