Join our community of smart investors

NewRiver in the Reit place

Convenience shopping and value retail still hold an appeal
December 28, 2017

Investing in retail real estate is currently not very fashionable, as the traditional high street loses its appeal to customers who prefer to buy online and use the big retail centres more as a ‘leisure experience’.

IC TIP: Buy at 319.6p
Tip style
Income
Risk rating
Medium
Timescale
Long Term
Bull points

Attractive dividend

Modest gearing

Diversified revenue stream

Development arm mostly derisked

Bear points

Interruption possible in rental income stream

Dividend currently not covered

However, delve a little deeper and there are parts of the retail sector that still hold an appeal, thanks to a change in consumer habits towards convenience shopping and away from the hypermarkets. NewRiver Reit (NRR) is ideally placed to profit from this as one of the UK’s largest owner/managers of convenience-led community shopping centres, representing 67 per cent of its property portfolio. Its retail properties boast a 97 per cent occupancy rate, have a diverse range of tenants (NewRiver’s largest tenant represents less than 3 per cent of the rent roll and its top 20 only 18 per cent) and at £12.82 per sq ft, rents typically account for less than 5 per cent of each retailer’s turnover. As well as convenience, the estate has exposure to another fast-growing sub-sector: value retail. Tenants include the likes of Poundstretcher and Poundland.

Shareholders benefit from this through a highly attractive dividend paid quarterly. And while the first-half dividend was only 95 per cent covered by funds from operations, full cover is expected once funds raised from a recent share sale are fully deployed.

Funds from operations rose by 8 per cent to £26.5m in the six months to September 2017, and this total is likely to increase as more development work matures. Enabling work is under way on 465,000 sq ft of mixed-use urban regeneration at Burgess Hill town centre, with the entire residential element already pre-sold for £34m, while the retail and leisure element is 60 per cent pre-let. A further 62,000 sq ft of retail space on Canvey Island is 75 per cent pre-let.

To finance this work and to fund further developments, NewRiver raised £225m through the sale of new shares at 335p in July. The placing was heavily oversubscribed and at a 15 per cent premium to March 2017 adjusted net asset value. Around £59m of this was used to acquire the other 50 per cent it did not own in the Bravo joint ventures, thus giving it control over a portfolio of four convenience-led shopping centres in Belfast, Glasgow, Hastings and Middlesbrough, with a gross asset value of £240m at an equivalent yield of 7.7 per cent.

Additional financial flexibility came with a new unsecured £430m lending facility, and the cost of debt will fall from 3.6 per cent to 2.85 per cent once a £215m revolving facility is fully drawn. The loan-to-value (LTV) ratio of 25 per cent should rise as placing proceeds are invested, but the target is to keep LTV below 40 per cent.

NEWRIVER REIT (NRR)   
ORD PRICE:319.6pMARKET VALUE:£968m
TOUCH:319.5-319.6p12-MONTH HIGH:369pLOW: 305p
FORWARD DIVIDEND YIELD:6.9%TRADING STOCK:nil
PREMIUM TO FORWARD NAV: 5%NET DEBT:34% 
INVESTMENT PROPERTIES£1.23bn  
Year to 31 Marnet asset value (p)Net operating income (£m)Earnings per share (p)Dividend per share (p)
20152654117.6817
20162956319.318.5
20172929019.923.0
2018*2999020.321
2019*30510322.422
% change+2+14+10+5
NMS:1,500   
Matched bargain trading    
Beta:0.26   
*Peel Hunt forecasts adjusted EPS and NAV

And NewRiver is keen to reduce risk by focusing development on extending assets it already owns. Such projects include 107,600 sq ft of extensions across the existing shopping centre portfolio and over 200,000 sq ft of residential potential above its shopping centre in Bexleyheath. This is efficient use of existing assets 

NewRiver also owns 336 pubs accounting for 14 per cent of its portfolio. An agreement with grocer Co-op has seen 14 of these properties converted into convenience stores for the retailer. The fifteenth store is expected to be completed by the end of 2017, and will trigger a performance bonus of £750,000. NewRiver will then receive between £75,000 and £200,000 for each store delivered. The current agreement is for delivering up to 40 convenience stores for fixed lease terms of 15 years at rents ranging from £15 to £17.50 per sq ft, and rent increases linked to the retail price index with a cap of4 per cent and a minimum of 1 per cent.

There are also plans to develop 59 pub sites for residential use, with plans to create about 200 units. Planning consent has already been secured for 107 units on 36 pub sites. Over time, these will then be sold on to local developers.

The company also generates funds by recycling assets where the return is attractive. In the first half of the financial year it raised £37.1m through disposals at an average 3.8 per cent ahead of the previous valuation.